Why Investing in Top Private Equity Talent is Key to Future Growth
January 29, 2024 – As competition for top talent grows, private equity firms must reevaluate their leadership needs and strengthen retention strategies. The private equity industry has entered a lull, according to a new report from Slayton Search Partners’ Dan Dunn. An article from Bloomberg says that firms are raising new funds at the slowest rate in over a decade; deal volumes and exit sales have dramatically dropped; and cash flows for PE investors have turned sharply negative. Tough competition for a limited number of acquisition targets has increased the difficulty of achieving profitability goals—and hesitance within PE firms has further aggravated the sector-wide slowdown.
“Reassessing and strengthening talent strategies will be key to shifting the tides,” said Mr. Dunn. “Effective leadership—and the ability to attract and retain talent across the organization—can revitalize activity in the industry while elevating agility within firms. As investment in portfolio companies slows, PE firms must make strategic investments in their own organizations for long-term growth.”
For private equity firms, strong leadership teams have long been a key indicator of high-potential portfolio companies, according to Mr. Dunn. “PE leaders evaluate potential investments with an organization’s current executives in mind—and upon acquisition, they’re often eager to replace existing leaders with candidates who better fit their strategic vision,” he said. “While the importance of portfolio-company leadership certainly hasn’t changed, the current inflationary environment and rising competition have proven that effective internal executives are equally as critical to success.”
A recent article from S&P Global says that private equity leaders have been cautious in recent years—pulling back in investments and keeping record levels of dry powder in stock. Simultaneously, sellers have been dissatisfied with declining profit margins, largely caused by rising interest rates, which has contributed to a 63 percent slump in deal volumes between 2022 and 2023, according to Reuters. “More than ever, PE firms need leaders who take strategic action to revitalize growth—but high-performing PE executives must offer different strengths than those they seek from portfolio company leaders,” said Mr. Dunn.
Dan Dunn joined Slayton Search Partners in 2020 as an executive vice president within the industrial practice. He is focused on leveraging his skill-set to drive value for industrial manufacturers, including private equity-backed mid-market portfolio companies and Fortune 500 organizations.
Whereas charismatic, relationship-building executives are key to value creation in portfolio companies, Harvard Business Review reports PE firms are 50 percent more likely to prize agility and adaptability for their own leadership teams. Slayton Search Partners notes that the strongest members of the C-suite will be resilient changemakers—from private equity CFOs who can create and regularly optimize strategies according to profitability goals to CEOs who act with urgency toward a clear vision.
“Finding or developing these high-demand professionals is the first step to continuous growth—one that requires careful evaluation of a leader’s ability to think on their feet and turn strategy into action,” said Mr. Dunn. “However, once firms acquire top private equity talent, they must turn their focus on retention, particularly as CEO turnover continues to challenge firms across the PE sector.”
Optimizing Retention Strategies
Turnover struggles aren’t exclusive to the C-suite. PE firms also face the increasingly high-cost challenge of retention at junior levels. Salary expectations are rising—private equity professionals now expect 13 percent higher cash compensation than in 2022—and those in junior roles expect the largest gains this year, according to the Wall Street Journal. “Aggressive recruitment strategies from PE firms are further driving up hiring costs,” Mr. Dunn said. “To avoid setbacks in profitability and productivity, PE firms must have equally aggressive retention strategies that convince top performers at all levels to stay.”
Related: How Talent is Driving Private Equity Success
Mr. Dunn also explains that flexible work arrangements may be key to retaining top private equity talent. Despite a growing interest in remote opportunities, less than one-third of PE leaders are prioritizing hybrid work strategies. Firms that offer flexibility—even beyond where employees work—have become destination employers. Altamont Capital Partners, for example, offers an unlimited PTO policy that enables employees to take time off whenever the lifecycle of a deal allows.
When Slayton Search Partners analyzed top trends in private equity for 2022, we identified diversity and inclusion as critical priorities—and now in 2024, they will continue to be driving factors for retention across PE firms. While the private equity industry has long struggled to prioritize the human aspect of the workplace, MIT Sloan found that failure to promote diversity, equity, and inclusion is one of the top contributors to toxic work culture—the leading driver of employee turnover. On the other hand, Gallup reports great culture provides a sense of purpose while empowering PE investors and leaders to drive business results.
Opportunities and Challenges in Private Equity Recruiting
Private equity firms are saying that talent is the most important factor in driving growth. While financial engineering, inorganic growth, and market expansion remain important tools in the private equity toolbox, talent continues to emerge as key to growing companies and achieving the investment thesis, according to a report from Bespoke Partners. Yet unlike strategic assets, intellectual property, or other resources that fuel growth, talent can be notoriously difficult to optimize. In fact, the biggest challenge for the PE sector is getting talent right, according to Nat Schiffer, managing partner at The Christopher Group. “PE firms often compete with other financial services firms, technology companies, start-ups, and other industries for the limited pool of qualified talent with the necessary skill-sets and experience for the PE industry,” he said. “The intense competition for top talent can make it challenging to attract and retain qualified candidates who may have multiple options.”
“PE firms require candidates with a specific blend of financial acumen, operational experience, and industry knowledge to drive value creation in their portfolio companies,” he said. “Finding candidates with the right mix of skills and expertise, particularly in specialized industries or niche markets, can be challenging, as these candidates may be in high demand and have limited availability.”
While McKinsey reports some progress in hiring women and ethnically diverse talent, 54 percent of women in PE still feel their career trajectory is limited by their gender. “Stronger DEI initiatives—such as the development of paths to promotion for historically underrepresented groups—are essential to the long-term retention of top private equity talent from diverse backgrounds,” Mr. Dunn said.
Entering the Future of Talent in Private Equity
While PE firms are lean businesses that commonly maintain their staffing levels, they have raised a significant amount of capital over the past four years, according to Mr. Dunn. “As deal activity continues its slow pace, investing in executive teams—leaders who can drive more strategic investments, organization-wide talent acquisition, and high-value activities—must be a spending priority,” he said. “As hiring costs mount and competition for top talent rises, a talent-focused approach will ensure C-suites are equipped with adaptable, innovative leaders who drive progress for years to come.”
“Strong retention strategies, including diversity and inclusion initiatives, will enable more than effective leadership—it will also drive talent acquisition and retention success in the junior ranks,” said Mr. Dunn. “Investing in top talent now, at every level, will empower PE firms and employees to make smarter business investments in the future.”
Established in 1985, Slayton Search Partners focuses on finding executive talent in the consumer, retail, financial services, insurance, industrial, and private equity sectors. The firm said that its network of industry leaders invariably leads it to opportunities outside of its core practice areas. Evolving markets, emerging technologies, and changing consumer habits have impacted all industries, said the search firm, and that the need for strong executive talent is far-reaching.
Related: The Market for Senior Roles Heating Up at Private Equity Firms
Contributed by Scott A. Scanlon, Editor-in-Chief; Dale M. Zupsansky, Executive Editor; Lily Fauver, Senior Editor – Hunt Scanlon Media
