Private equity firms must retain key talent to stay competitive

As the merger and acquisitions market cools, private equity firms believe that obtaining and retaining top talent is essential for them to come out ahead of the curve, when demand recovers. Three-quarters of firms with more than $15 billion in assets under management say that talent retention is their top priority in the year ahead.

The total number of mergers and acquisitions – and their value – fell in 2022, with economic storm clouds on the horizon. Volume in 2022 fell by 19%, with 853 completed globally, compared to 1,047 deals in 2021 – and was exacerbated by a drop in buyer performance in the second half of the year, putting more buyers off of deals.

If private equity firms are to succeed in this challenging environment, a new poll from EY has shown that most leaders believe human resources will be key to adapting. Polling more than 100 chief operating officers and chief financial officers from across the private equity landscape, EY found the large majority of investors rated talent management more important than the likes of ESG, portfolio optimisation, cost management, or digital transformation.

“Whether private equity firms grow, consolidate or even down-size, one factor remains constant – the continues to be a people-intensive business,” commented Bridget Walsh, EY’s Global Leader of the private equity practice.

Around 22% of respondents said their firm had experienced margin erosion over the past two years. Finding the right talent to help correct that is proving difficult for many organisations, though, with almost half of private equity firms noting that that they been impacted by hiring difficulties over the last year.

In particular, EY’s survey found that the biggest impact was felt when private equity firms tried to attract and retaining talent at the junior levels, among professionals with less than three years of experience. The researchers note that in the young professionals segment, investors face tough competition from large banks, top tier consulting firms, and the bustling start-up scene.

This means that private equity firms need to adapt how they go about attracting entry-level staff. Traditionally, compensation levels vary by some distance depending on the tenure of employees. At the same time, employees with less tenure are usually rewarded with shorter-term compensation increases, such as a higher annual salary, while employees with longer tenures are also the recipients of long-term incentives, such as carried interest.

At present, adapting this seems to be off the cards, though. Instead, to deal with this talent shortage, private equity firms are focusing on additional outsourcing, improved automation and realignment of their talent strategies – including more allowing for more flexible working. Meanwhile, around four-in-10 respondents are increasing diversity and inclusion in 2023, to make the most of talent pools they might have historically overlooked.

Walsh added, “People have always been central to the private equity business, and the firms that are capable of recruiting and retaining talent, have consistently achieved a competitive edge. To that end, CFOs and COOs should worked with the C-suite and their HR Director and team to develop successful strategies for their most important asset – human capital.”