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Executive recruiters and compensation consultants are anticipating a slowdown in private equity hiring in 2023, but mass layoffs aren't in the cards.

Amid declining fundraising figures and a difficult dealmaking environment, PE hiring will likely wind down moving into the new year, but the asset class's strategic insulation from market turmoil means it won't grind to a halt. With ample dry powder, longer-term investment horizons and income from management fees, PE firms may slow down growth, but they won't stop it.

In its financial services compensation Q3 trends and year-end projections report, compensation consulting firm Johnson Associates said it anticipates firms across financial services will reduce hiring plans and initiate some layoffs as cost-cutting pressures mount at the end of 2022. Alan Johnson, managing director of Johnson Associates, said this trend should extend to PE, but to a lesser extent than big banks and traditional asset managers.

PE firms spent the last three years building out their teams at a rapid pace, and now they're fully staffed, Johnson said. Because these firms are no longer building teams to keep up with growing workloads, they're naturally slowing down hiring, regardless of the market downturn. According to a J.Thelander Consulting survey of PE and VC firms, 32% of respondents said they do not plan to hire new staff in 2023, up from 21% in March 2022. However, only 13% of firms said they are planning on freezing hiring due to a potential recession.

PE fundraising and dealmaking are down significantly from 2021, with mega-funds down 5% to 10% and mid-to-large funds down 15% to 20%, according to the JA report. From January to November, alternative asset managers underperformed the S&P 500 by 28%. Driven largely by the death of the IPO, PE exit activity also struggled in 2022, with total deal value falling from 2021's $863 billion to only $293 billion by the end of Q3 2022, according to PitchBook's latest US PE Breakdown.

Despite its challenges, the private equity industry is propped up by its swaths of dry powder that could blunt the impact of short-term declines. In fact, global PE dry powder reached $1.2 trillion by the end of Q2, according to PitchBook's Q2 2022 Global Private Markets Fundraising Report.

While Johnson expects a hiring slowdown, he said he would be surprised if PE firms made significant layoffs in 2023. Jody Thelander, head of J.Thelander Consulting, also said she has no expectations of layoffs. Charles Skorina, managing partner at Charles Skorina & Company, which recruits for endowments, foundations and institutional asset managers, said he doesn't expect layoffs in PE because of the industry's ample supply of dry powder.

"As long as PE firms have these huge amounts of capital to invest, I don't think they're going to lay off much—at least I don't hear it and I don't see it," Skorina said.

Consistent income from management fees also keeps the private equity industry afloat amid market dislocation. Joseph Healey, leader of Korn Ferry's private markets practice, said he doesn't anticipate any market-driven layoffs, largely because PE firms hold longer-term commitments than shorter-duration asset managers—such as hedge funds—and rake in guaranteed management fees over the entire lifespan of their funds. For example, a pension fund that commits $100 million to a PE fund has also agreed to send money when the fund issues a capital call in addition to a 2% management fee every year. The "extraordinary" amount of management fee income has a stabilizing effect on talent acquisition and retention, Healey said.

While Healey expects a hiring slowdown in the wake of the lull in investment and fundraising activity, he doesn't foresee an industry-wide hiring freeze.

"If you were going to hire five associates next year because that was your growth plan, that might now be three associates, but I guarantee you it's not zero associates," Healey said. "Because what always follows a dislocation is a rapid escalation of activity."

Some recruiters aren't seeing any signs of a slowdown. Sasha Jensen, founder and CEO of executive search firm Jensen Partners, said her firm's numbers haven't indicated any slowdowns in PE hiring. In fact, Jensen said her team's executive search count increased year-over-year in 2022.

Jensen said she also expects PE compensation levels to remain high and competitive.

Featured image by Vitalii Vodolazskyi/Shutterstock

This article originally appeared on PitchBook News