M&A How PE Firms are Dealing with a Hybrid Work Environment — Mergers & Acquisitions

Hybrid home-office work arrangements, the demands of a younger generation of up-and-coming executives and pressure to develop more diversity in leadership are all impacting the recruiting efforts of middle-market private equity firms.

Private equity firms are facing the same pressures to continue hybrid work-from-home arrangements that all businesses are, says Clark Waterfall, co-founder of BSG executive search firm. “It’s really tough to get the genie back in the bottle,” he says. “Once you have everyone go virtual, trying to get people and teams back together in the office is just way harder. People realize, hey, I get two hours back in my life each day, 10 hours a week on a commute basis. And it turns out that the partners aren’t really in the office either.”

Overall, PE firms are acknowledging even at the executive level that virtual and hybrid work arrangements can work well, and that they make it easier to retain talent, Waterfall says.

The new normal is a hybrid work week with three days in-office and two days working from home/remotely, says Robin Judson, an alternative investment firm executive recruiter in New York. “I’m not aware of anybody who’s back to five days a week in the private equity or private debt world.”

Take This Office And…

Another issue that PE firms are grappling with is how hard to push younger employees on working more in the office. At a certain point, employees who don’t want to work in the office as much as their employers would likely “fall into the Great Resignation bucket,” Waterfall says.

“They’ll say: ‘Listen, you know what, I can go work for another firm. I can work virtually. It’s not that important; I really don’t want to come in,’” he says. “I know a bunch of private equity firms that are really struggling with that.”

But, Waterfall says while young PE professionals may be apt move to other PE firms, the vast majority aren’t leaving the industry over “work-life balance” issues or “work-life integration” issues—the latter term recognizing that a literal balance between work and life outside of work may be an unrealistic aspiration in private equity.

At GTCR, a Chicago-based middle-market PE firm, the feedback was positive about returning to work in the office and being able to collaborate in person once again, says Melissa Mounce, managing director, leadership talent and diversity, for the firm.

“For new associate deal professionals, it was really difficult as we onboarded everyone during the summer of 2020 in a virtual environment,” she says. “So much of our environment is experiential learning and real-time coaching and mentoring. There’s a much different dynamic when you’re together, working on a project and being able to have those quick and informal conversations versus the formal scheduled Zooms.”

Legacy Issues

As PE firm founders grow their businesses and eventually look to pass the leadership baton to the next generation, the hybrid and virtual work arrangements have made such transitions more challenging, Waterfall says. Also, the next generation of potential leaders is more careful in considering opportunities to lead firms, he adds.

“There’s some thoughtfulness that was not part of the Baby Boomer generation, which was: ‘Always raise your hand,’” he says. “You always said: ‘Put me in coach.’ You always said: ‘You tell me how high, I’ll jump. I’ll take whatever responsibility you want to give me.’

“From one vantage point, you could say the younger generation is smarter and more selective and not willing to subordinate life to work. Or you could say that they just have a very different value system and are not interested in the pressure cooker,” Waterfall adds.

But not everyone is so selective. Women, for example, generally are more willing than men to take on more responsibility when leadership opportunities arise, he says.

Roles in Demand

Two PE roles in particular that are now in demand include “value creation” positions and chief talent officers. More middle-market PE firms are evolving to create new value creation or operating partner groups—teams that work with portfolio companies after the companies are acquired to develop their growth plans and to contribute operations help, Waterfall says. “Those roles continue to be pretty highly sought after,” he mentions.

Chief talent officers are in high demand by middle market firms, partly because of all the critical HR issues that popped up during the pandemic– Covid workplace safety, testing, and remote work technology and policies, for example, Waterfall says. And low unemployment plus talent acquisition and retention challenges for both funds and portfolio companies has “amped up” interest for CTOs. Historically, middle market PE firms have been lightly invested in HR functions.

Waterfall says he has also seen an uptick in young PE professionals leaving middle market firms to join portfolio companies, moving from both dealmaking and operating roles on the PE side with an eye on eventually moving into chief operating officer, chief financial officer or CEO roles. But it’s too early to tell if most of those professionals will eventually boomerang back to private equity.

“I think that it’s this coach-on-the-sidelines versus play-on-the-field thing. It’s really exciting and sexy and alluring and appealing to have a tour of duty in a company and not just invest manage, monitor and advise,” Waterfall says.

Diversity Hires

Since around the time of the George Floyd murder and protests two years ago, PE firms have gotten more serious about hiring of minority and women candidates, Judson says. To access a larger pool of diversity candidates, firms are turning to minority and women candidates who may have started out in private equity, but then moved into corporate or consulting roles, or even started their own companies. Firms are also working harder on developing internal leadership.

Robin Judson, Robin Judson Partners

“You can’t create people out of whole cloth, so you have to either bring people back into the market who have gotten seniority and knowledge elsewhere and bring them back in, or you have to really develop the diverse employees that you have,” Judson says. “You have to nurture them; you have to make sure that they are being prepared for leadership because otherwise they’re going to be swept up by somebody else.”

PE firms cannot assume that their job is done once they’ve hired a diversity candidate, and they can’t assume that the integration process is the same for a diversity candidate as it is for a non-diverse candidate, Waterfall says.

Often, middle market PE firms don’t have the dedicated budget or headcount to focus on inclusion after hiring. They need to budget for inclusion, but their focus should not be just on helping the newly hired diversity executive to adapt, Waterfall adds.

“It’s not just: ‘Candidate beware; we’ll get you a coach; you’ve got to deal with us as we are, and here’s your Rosetta Stone coach who’s going to help do the translation for you,’” he says. “It really requires some behavior change on the company’s side from what they’ve operated as in a homogenous environment, whether it be all-male or all-white or all middle-age or whatever your sub homogeneity vector is.”

PE firms need to foster inclusion by considering onboarding both from the new hire’s perspective and the company’s perspective. Otherwise, there’s a risk that the new diversity executive will feel tokenized or misunderstood compared to co-workers—that they’re not heard; that they feel like an outsider or they’re not making the impact they had hoped to. They can get frustrated and the frustration can lead to a higher risk of flight or outright departures from the firm, Waterfall says.

Part of the onboarding process is identifying the people around the new hire who are key stakeholders for the success of the new hire, Waterfall says. And between the candidate and the company, it’s usually the company that has the steeper learning curve for integration. “A diversity candidate has been dealing with integration mechanisms likely their entire life if they’re in financial services. They usually have a pretty good toolbox. But it’s usually very new to the company,” he says.

Some PE firms are investing in the college pipeline to improve diversity in the industry. For example, HPS Investment Partners and the Kapnick Foundation gave $10 million to Howard University in 2021 for a program to help students prepare for careers in private investment and investment banking. Also last year, the Blackstone Charitable Foundation committed $40 million to an expansion of its Blackstone Launchpad entrepreneurship and skills-building program to colleges and universities with majority diverse populations or under-resourced communities. That included the historically Black schools of Morehouse College, Spelman College and Clark Atlanta University. Impact Capital Managers, a membership association of more than 85 private equity funds, places graduate students from underrepresented backgrounds at summer internships with PE firms through its Mosaic Fellowship program.

Ann Leng, Spring Lane Capital

Spending more time with job candidates to learn more about them also helps to make them feel more included, says Ann Leng, CFO and COO of Spring Lane Capital, one of the firms that has hired Mosaic interns. In a typical interview process, spending 45 minutes or an hour with a candidate can lead to a lot of assumptions or stereotypes by the PE firm to fill in the blanks, she says. Spring Lane does a “deep dive” of more than four hours with each of its candidates, along with mentoring and periodic reviews and feedback.

“Because we know every new hire so well, we’re able to come up with a more tailored approach to this person,” Leng says. “We understand what kind of project will make them excited or challenge them–will not make them bored–and what kind of project or functionality will make this person shine and thrive.”

Casting a Larger Net

Many middle-market PE firms have been expanding their pool of candidates in their search for new talent. GTCR is one such firm that has been casting a wider recruiting net recently.

The Midwest firm opened an office in New York in 2021 to gain better access to the talent pool of young professionals in investment banking or private equity who have put down roots in the area, Mounce says.

GTCR is also investing more in professional development to train up recruits that come from non-PE or non-investment-banking backgrounds, such as from consulting positions at Bain & Co., Boston Consulting Group and McKinsey & Co., which allows the firm to recruit from a larger talent pool. A larger talent pool means a greater diversity of candidates, by gender, ethnicity, geography and professional backgrounds, Mounce adds.

The goal is to attract candidates who are well-suited for the deal professional role and then build up foundational skills, such as in financial modeling, that they might not have acquired earlier in their careers. “Many of those firms that have a very rigorous analysis and very good understanding of market dynamics, take a very deep and analytical focus into the things that we focus on as well from an investment standpoint,” she says.

Quantitative skills like financial modeling can be taught pretty quickly through training and development programs and bootcamps, Mounce says. But qualitative skills—good judgement; interacting credibly with executives, management teams and peers; collaborative skills; analytical skills—are more natural skill sets that are harder to teach.

Mounce says she hasn’t seen the Great Resignation—the economy-wide trend of people quitting or switching jobs since 2021—manifest at GTCR. PE professionals in general tend to be more committed to long-term careers in private equity.

But the firm has beefed up its parental leave paid time off benefit this year to appeal to its PE professionals. “We found for mid-career it’s a very important benefit and a very important milestone in people’s lives that they need to consider and plan for,” Mounce says.

Private equity firms are also retaining their executives with long, broadly written non-compete agreements, promotions and massive hikes in compensation, Judson adds. The competition for finding new talent is so great, it only makes sense to invest heavily in not losing what you already have.

“I think it’s about preservation as much as it is about identifying new talent,” she says. “I think it goes back to nurturing—you have got to value the people who you already have.”

Finding a new person who’s a fit for your PE firm means finding someone who fits your strategy, who knows your process, who can close a deal, who can work with portfolio company management, and who fits your culture, Judson says. Plus, even if that person does fit with your firm, they’re probably going to change the culture of your firm, because all new hires at the senior level do to some degree.

“Finding all of those factors in one person, it’s a tall order, and if you have somebody there in your own firm who has shown that talent you don’t want to lose them. Replacing them is enormously difficult.”

For PE executive positions above the vice president level, most of the incoming talent will come from other PE firms. What appeals most to those executives? “Carry, carry, carry, carry–everybody wants carry,” Judson says. “If you’re moving from one private equity firm to another, there’s far more emphasis on things like carry and partnership and growth trajectory.”


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