Even as recession looms, private equity firms are unlikely to cut their work forces as many asset managers have been doing over the past few months. Instead, industry executives say PE firms are putting resources into retaining existing staff, hiring for new or expanded roles, and becoming more sophisticated about their talent management strategies.
PE firms’ commitment to hiring and retaining talent is reflected in the data. More than half of private equity firms with assets over $15 billion said talent management, including increasing the diversity of their staff and implementing flexible work plans, was the most important strategic priority aside from asset growth, according to the latest report from Ernest & Young. The percentage prioritizing hiring and retention was even higher (65 percent) for PE firms managing $2.5 billion to $15 billion in assets. Only 46 percent of PE firms with fewer than $2.5 billion in assets said talent management was number one, in part because many smaller shops have outsourced critical functions to third-party vendors.
Other key considerations for PE firms include improving back office, expanding product lines, and environmental, social, and governance issues, according to EY. The report was based on a survey of 112 chief financial officers and chief operations officers at global private equity firms.
Private equity firms’ attention to talent is counterintuitive to what many people expect from PE in an economic downturn. “They’ve been acting like we’ve been in a recession for the last year,” said Sean Mooney, founder of PE consulting and solutions provider BluWave. That could make PE firms better prepared than other investors if a recession hits the market this year. Private equity firms are asking, “‘How do we find opportunities? How do we thrive and grow our companies?’…They are hiring people strategically to transform a company.”
Kyle Burrell, a partner at EY, said record fundraising activity in 2021 is one of the factors driving PE firms to hire more talent. “They have to make decisions around deploying that capital,” which means they need to expand their finance team and technology infrastructure to support large capital deployment, he said.
“Companies in a wide range of industries reported facing stiff hiring challenges last year,” the EY report said. Private equity firms, particularly bigger ones, are dealing with the same issues as firms compete for employees.
The report also found that the biggest challenge has been attracting and keeping junior-level employees with less than three years of experience. “Private equity firms will need to determine whether this is the impact of a generational shift that would require a more strategic action plan or if it is something that firms can address by just engaging more with junior employees,” according to EY.
Burrell said good compensation alone isn’t enough to keep the younger generation in the private equity workforce. “Some of the non-compensation aspects of retaining employees are the things that the new talent would like,” he said. That includes providing flexible work arrangements and improving wellness and other benefits. Some firms have also offered rotational programs for younger employees, which can expose them to different functions of the firm, according to Burrell.
PE firms have also made efforts to increase diversity and ensure an inclusive culture as part of their talent management strategies, a move that would appeal to the younger workforce, according to the report. But PE firms have lagged behind their peers in makiing progress towards increasing racial and gender diversity.
According to data from BluWave, managing employees accounted for 41 percent of the activity that PE firms looked to outsource in 2022, up from 39 percent in 2021 and 37 percent in 2020. The rise of so-called human capital activity stems in part from PE firms needing people with a wider range of talents and skills to help expand their businesses in today’s environment, according to Mooney.
Sales and marketing, for example, is an area that has been traditionally ignored by PE executives. But such functions have become increasingly important as PE firms try to distinguish themselves from competitors. “The really good firms are starting to see [the trend],” Mooney said.