Strong relationships were a key talking point at Private Equity International’s 15th annual CFOs and COOs Forum in New York last month.
While building relationships outside the firm – with investors, portfolio managers and outsourcing partners – should be a top priority, strengthening those inside the organization is equally, if not more, valuable to a firm’s future success.
Data from EY’s fifth annual Global Private Equity Survey, which collected the views of 110 private equity CFOs, highlights that human capital is not only an asset – it’s also a risk.
It should come as no surprise that the top strategic priority for the majority of CFOs (58 percent) is asset growth. But second on the list, with 47 percent, is talent management. What’s more, after performance, the CFO respondents chose talent attrition as the top risk facing their firm.
One thing the report – and delegates at the forum – made clear is that competition for talent is fierce. The report notes that as advanced technology and quantitative skills become more important, firms are starting to compete for talent not just with other private equity funds but also hedge funds, fintech firms and others within the tech space. In fact, data released by search firm Heidrick & Struggles last year showed that competition from tech firms was pushing up private equity salaries for junior talent.
“In response to this pressure, CFOs are focused not only on compensation, but also on building the infrastructure to provide a more structured path for retaining and promoting high performers,” the EY survey reads.
By far the most effective talent retention tool was title changes or promotions (62 percent) followed by flexible work arrangements (51 percent) and formal training (50 percent).
“For the high performers – and I underscore high performers – we try to give them more roles and responsibilities through promotion and title changes,” one of the delegates at the forum said, adding that it’s not always easy to decide who moves up and who doesn’t “because there’s a consequence to that”.
One delegate highlighted just how marketable – and ripe for poaching – someone with eight to 10 years’ experience in the finance team at a private equity shop is.
“It’s hard to replace that eight to 10 years of experience. It takes a long time and it’s very costly,” the delegate said. “[The finance team] is not the same structure as the deal side where you have classes of people coming in every year that you can replenish.”
This has a significant impact when it comes to planning the future leadership team. While almost 80 percent of firms have a strong pipeline of next-generation leaders on the investment side, on the finance side it slips down to 54 percent.
Another powerful retention tool not mentioned in the survey is to include the finance team in the carry pool. Clearly, the financial element carries a lot of weight, but involving the finance team in the success of the firm helps them feel as if they are working towards a common goal.
The value of investing in those will help to secure a bright future for the firm should not be underestimated.