Right-sourcing

Private equity has long had a natural tendency to hire someone in when needs change or complexity increases. However, the past 12 months have chipped away at many of the reasons behind this approach.

Much of private equity’s preference for recruiting and keeping work in-house has been rooted in proximity; being able to walk over to someone’s desk to request a report or discuss the matter at hand. However, given the shock events of the past year, no one has had the luxury of popping over to someone’s desk.

After 12 months of working remotely, is private equity’s attitude towards recruitment versus outsourcing changing?

Close to me

According to Barnaby Piggott, CEO and founder of Holland Mountain, private equity’s mindset had already been steadily shifting towards a more balanced approach when it comes to recruitment and outsourcing. “It is shifting towards right-sourcing, where firms can have the right mix of in-house people delivering and overseeing functions that have been outsourced to a third party.”

For Piggott, this change in thinking had been gradually building prior to Covid, due to the increased number and variety of outsource providers. “There are more service providers in the market, and it’s become richer in the services being offered.”

That being said, the past 12 months have had a major impact on management’s perception. “Senior stakeholders in private capital firms have historically required all employees to work in the office, being visible and available. Covid has forced management to drop this office-only-based approach, but the same work is still getting delivered,” says Piggott. And with that, the desire for proximity is falling away. “There was this perception that teams needed to be in the office so they could talk to each other, go to each other’s desks, but that’s been proven not to be the case for work to get done,” he adds.

As attitudes around being together change, so is private equity’s mindset when it comes to outsourcing. “Not being in the same building has been a major barrier against outsourcing. Now decision makers have got their head around that being ok,” explains Piggott.

Are you experienced

Despite the last 12 months proving that working remotely is possible in terms of dayto-day activities, challenges have presented themselves when it comes to training and development. And that has impacted GPs’ requirements when it comes to new recruits.

“Over the last year we’ve seen more demand for people experienced in private equity,” explains Henry Price-Haworth, lead consultant, finance & operations at PER. “Due to remote working, many firms are opting to bypass the training period that someone from practice or audit may require.”

Size matters

Of course, the size of a GP is a major factor when it comes to recruitment and outsourcing decisions, and especially so when thinking about future growth. “There’s no question that outsourcing will position you, in theory, to scale,” says Piggott. “There are other things tied to that; obviously cost is an important point. As you scale, how cost effective is the scaling model with the headcount of an internal team versus a third party service provision?”

Price-Haworth agrees, “Especially at the early stage, GPs are weighing up the cost of outsourcing and the cost of hiring in. Emerging managers are looking to hire someone to set up processes and enable growth. Some firms use the outsourcing model for as long as they can, up until a point where their AUM is sufficient enough to hire a team that can report specifically to their investor’s needs.”

Price-Haworth sees clear differences between a firm’s size and its outsourcing approach. “Larger funds tend to prefer to keep Things in house, while smaller and emerging funds are more likely to outsource the finance and compliance functions.”

However, he has observed some nuances when it comes to compliance. “It’s more of an even split with compliance outsourcing. Sometimes it can be more cost effective to hire someone in. We’re seeing more demand for FDs and CFOs with compliance experience. And we’re seeing those sorts of people going in to bring compliance back in house,” adds Price-Haworth.

From an operational perspective, growth means more complexity. Says Piggott, “When you’re dealing with complexity, in theory you need more people if you do it internally, but if you’re working with a service provider it’s easier. For example, if a GP outsources its IT outsourcing, and is looking to open four new offices, that’s much easier with a provider that has that coverage.”

Internal rate of return

Managing scale and complexity has long been front of mind for operational leaders, regardless of the pandemic. Far more pressing is the return to offices. How have recruitment and outsourcing decisions been affected by the eventuality of getting back to office-based work, at some point?

Piggott believes there will be a couple of big challenges for GPs when they return to the office. “Firstly, private capital managers are going to need to adapt their working arrangements for existing team members
returning to the office familiar with the pre-Covid culture. Secondly, new joiners, not familiar with the pre-Covid culture will need to be integrated into this evolving work environment.”

For Price-Haworth, it comes down to the flexibility of the GP. “Candidates have been asking us about the return to work, questions such as how often will they be in the office. From the GP’s point of view, it’s better if the new hire wants to go in because then the training efforts can immediately get going.”

The past 12 months have undoubtedly been a catalyst for already changing mindsets in private equity when it comes to both recruitment and outsourcing. “2020 has definitely had a big impact on GPs; they are looking at their people, processes and technology stacks – the whole operating model,” says Piggott. “But it’s not all related to outsourcing more; some GPs are looking at existing third party relationships and how they can restructure them to work better and more efficiently.”