New tools needed?

by Jon Whiteaker 2 October 2023

Talent recruitment and retention remains a leading concern for operational leaders in PE. According to a survey of US-based PE CFOs conducted in Q2 2023 by US executive search firm Eastward Partners, three quarters (74.3%) of respondents cited talent shortages as having a very significant or medium impact on the efficiency of their firm.

However acute the challenge may be, strategies for talent management have to be weighed against the priorities of profitability and returns to investors, particularly amid challenging market conditions.

The Drawdown has spoken to a range of CFOs and operational leaders working for midmarket PE firms to learn about their talent management strategies. Most of them wish to speak off the record, allowing them to be more candid with their comments.

The picture that emerges from these conversations is of a lack of standardisation across the industry. Operational leaders recognise why it can be difficult to retain talent but different firms approach the same challenges in very different ways.

Eastward Partners found that across all roles in PE, excellent compensation and benefits was the top reason to stay with a firm (69% of respondents), followed by challenging and impactful work (52%) and flexible work arrangements (45%).

These three areas are also highlighted as critical by the European midmarket CFOs The Drawdown has spoken to for this article, though there is little consensus on exactly what tools are needed to meet staff expectations.


Among our CFOs, carried interest is unsurprisingly cited as the most effective talent retention tool, though no standard exists for who gets it.

“I was at dinner with industry peers recently,” says one midmarket CFO, “and everyone there had a slightly different approach to how carry is allocated.”

Another CFO says they were the only individual outside the investment team allocated carry, adding: “I know we are a bit of an outlier – we are meaner than most.”

Some firms offer carry to all heads of department, some managers offer it to deputies to the CFO, and often it is decided on a case-by-case basis with managers having to make ad hoc requests to deter potential flight risks.

What all of our CFOs agree on is that operational professionals are receiving a lot more carry now than a decade ago, as the importance, understanding and respect for their roles has increased.

Co-investments and equity are more broadly offered and are cited as an important retention tool by all the operational leaders we have spoken to. Again, there is significant divergence and debate on how best to structure this as a benefit.

“I had a conversation with someone recently whose firm had just issued their first equity payments to their people and they said they wished they had added a value to that by requiring employees to pay their way in rather than giving it for free,” says Sarah Gledhill, managing director at InfraRed Capital Partners. “Psychologically, if you receive something for free you value it less highly than if you’re investing or paying a deposit towards it.”

Carry and equity allocation strategies must also evolve as the firm does. One CFO says its founding partners still benefit from the lion’s share of carry, given the relatively young age of the firm. They add that updating remuneration schemes as the firm grows becomes an ever more urgent priority.

Challenging work

While compensation remains the main retention tool, there is a growing appreciation for the importance of work culture, work-life balance and the day-to-day requirements of the job. The variety of work available within a midmarket firm has long been a selling point to potential employees.

“Non-investment roles require skills that are more transferable to other industries,” says Gledhill. “So smaller PE firms try to give these individuals more interesting work and more visibility of the business side, which is often more attractive to them than being stuck as a tiny cost centre in a massive organisation.”

Technology is increasingly automating many of the more tedious processes involved in finance and operations, and this is enabling staff in these areas to focus on more rewarding work linked to value creation through operational efficiency.

“The systems you use can be quite important in keeping your operations teams engaged,” says one CFO. “When I joined, everything except the front end for investors was on Excel and people were frustrated spending hours on these tedious spreadsheets that are fraught with risk.”

Market conditions are also amplifying the importance of operations teams. One CFO says that during the last year, their investment team has largely been clocking off at 5pm, with little to keep them busy. In contrast, the ops team has continued to be busy with crunching audits, tax return compliance and ever increasing regulatory challenges.

The issue is often providing clear career progression within a relatively small team. One CFO says: “People want to know: ‘Where am I going next? What is my next role?’ I don’t want to just manufacture a role or promotion but I also don’t want to lose really good people.”

Flexible working

A tension point identified by many of the professionals we have spoken to for this article is the expectations of younger employees for flexible working and a growing desire by senior managers to get staff back into offices.

Everyone interviewed says they require at least three days in the office now, typically Tuesday to Thursday. Some stipulate that more junior team members have to be in more often but everyone acknowledges that employees’ expectations post-Covid increasingly have to be balanced with the needs of the business.

“Twenty-somethings are looking for more flexibility,” says one operational leader. “Five or even four days in the office is a really tough sell now. They also want confirmation from you at the interview stage that your flexible policy won’t change.”

The consensus is that coaxing young staffers back in needs to be done more with a carrot than a stick, with one saying: “You need to convince them that coming into the office is more attractive than them being on their own in a one-bed flat.”

Some report success, with Gledhill saying: “People have wanted to be back in the office. It has happened by osmosis rather than in a dictatorial way... You have to demonstrate the value of the watercooler chat. I find that most young people want to learn but some young grads have no experience of anything pre-Covid.”

Others worry about a lack of work ethic encouraged by flexible working schemes and that younger employees need to be more prepared to work long hours. “My view is, if you sign up to work in private equity or at a hedge fund, the reason you are paid more than being an accountant at a local council is because it is a very demanding environment,” says one CFO. “That is the trade you make.”

Culture and diversity

Widening the recruitment pool clearly helps address talent shortages, and most interviewed for this article see midmarket PE as a more welcoming profession than 10 years ago.

Gledhill says the industry culture “is moving away from the old-fashioned investment banking style towards more of a blue-chip organisation style, where staff are not just treated as a number on a spreadsheet but a valued member of a team”.

Others note that the industry compares favourably to other segments of financial services, which remain notably homogenous. Referring to foreign exchange brokers, for example, one female CFO says they imagine “a female or non-white employee would feel out of place within a team like that”.

Even so, all of the operations professionals interviewed acknowledge that diversity within senior positions remains a problem. A recent report by McKinsey found that less than 20% of C-suite roles in PE globally are held by women, and at managing director level the figure is only just above 20%. The same report predicts that it would take 66 years for women to close the gender parity gap in PE investing roles in Europe, based on current trends.

Some firms have dedicated resource within the HR function responsible for ensuring all employees have support networks and adequate training to help a diverse junior talent pool become the leaders of tomorrow, but intractable obstacles remain.

The most cited is support around maternity leave and childcare. All firms spoken to either offer enhanced parental leave for fathers or are planning to do so, but most report a lack of take-up from male employees.

One CFO is fatalistic about improving diversity within the industry, concluding: “Some roles in some jobs are just more suitable for certain lifestyles than others.”

Others interviewed are more optimistic, though concede that it might take a generation, with current industry leaders retiring, for there to be real change in PE.

But if operational leaders want to retain the best talent, it is clear they need sharper tools than merely the promise of carried interest at some point in the future.

Categories: AnalysisESGESG policyHuman CapitalHR / talent managementRecruitmentWellbeing

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