Are private equity funds showering staff in rewards to retain top talent?

Private equity firms are taking strategic measures to retain talent amidst a prolonged slump in deals, according to an article by Bloomberg. Charlie Hunt shares his thoughts and what we have seen in the market over the past few years.

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What is the article saying?

Amid a deal slump, private equity firms, surveyed by Preqin, are strategically retaining talent. Challenges in fundraising and stake exits due to borrowing costs have led firms to prioritise employee satisfaction, becoming more selective in hiring. The 2023 report highlights a significant rise in base salaries, notably for mid-level positions, averaging a 10% YoY increase. Senior roles saw a 9% boost. Performance shares are gaining traction, offered by half of surveyed firms, up from 24% in 2022. Cash bonuses in 2023 are expected to be more restrained, and fewer firms anticipate base salary hikes exceeding 10% in 2024.

The private equity industry faces a downturn, with global deal values down by about a third due to economic uncertainty, geopolitical tensions, and central banks' interest rate increases. 2023 fundraising is expected to fall short of the previous year, with a 48% drop in fund closures. In response to the challenging environment, firms are offering non-salary benefits like student loan repayments, personal leave, and car insurance assistance. Over the past two years, employee personal time-offs have increased, with an additional two days for personal leave and an extra day for vacations at all levels except managers, who received two additional vacation days in 2023.

What are we seeing in the market?

Traditionally, PE/VC funds faced little challenge in attracting talent, given the inherent appeal of the industry. They could afford to be selective, choosing candidates without actively marketing themselves. However, the industry's expansion, coupled with a rapid influx of capital over the last decade, has brought about a paradigm shift. Today, funds find themselves in direct competition for skilled professionals, not only with each other, but also contending with the allure of other thriving sectors like technology and tech start-ups.

Simultaneously, the industry's growth has created more opportunities for professionals to move between funds. As a result, GPs/LPs are now compelled to adopt a more strategic approach to retaining their top talent in this increasingly competitive environment.

With my experience dating back to 2001, I've observed the industry's gradual institutionalisation. Although many funds still operate as partnerships, there's a noticeable trend towards a more corporate structure. The conventional narrative of individuals joining a fund in their mid-late 20s and staying for their entire careers is waning. The scale of operations dictates a shift in hiring practices, as funds can no longer assume every hire will ascend to a partner role. The promise of carry alone is no longer sufficient to retain talent when individuals perceive better opportunities elsewhere.

While the insights from the Prequin report may not be ground-breaking, they echo ongoing trends of the past decade. However, it's indisputable that these trends have intensified in the last five years, reaching a zenith in 2022. The explosive growth in the number and Assets Under Management of funds between September 2020 and September 2022 resulted in increased hiring, directly impacting remuneration.

In practice, this has prompted funds to enhance the attractiveness of their pay and benefits to distinguish themselves in the competitive market. Furthermore, funds now need to adopt a proactive stance, actively selling their appeal to potential candidates. The responsibility lies with funds to thoughtfully consider the needs of their people and ensure that their remuneration packages align with the expectations of the current dynamic workforce.

What does this mean in practice?

The Prequin report highlights ongoing industry trends that, while not ground-breaking, have significantly intensified over the last five years, reaching a peak in 2022. Funds have been prompted to enhance pay and benefits, adopt a proactive approach in appealing to candidates, and consider the evolving needs of their workforce. 

Going forward, funds will need to continue to adapt their compensation packages to distinguish themselves in such a competitive hiring market.

Referring to our annual investment professional remuneration survey, encompassing insights from 179 funds and representing 2,388 professionals, a notable inflation in remuneration was observed between September 2020 and September 2022. The peak of this inflation transpired between January and July 2022, with figures stabilising thereafter. Cash compensation within investment teams typically exhibited growth ranging between 8-12% as indicated in our 2022-2023 reports (September to September).

The driving force behind this surge in compensation can be attributed to competitive hiring pools, including investment banks, corporate finance houses, and consulting firms, all elevating their remuneration structures to retain top talent. Consequently, PE funds found themselves compelled to offer more competitive packages to attract associates. This upward trajectory continues as senior associates, recognising the increased

compensation for new hires, seek adjustments to acknowledge their accumulated experience. This trend permeates through various levels, impacting Vice Presidents, Principals, and Directors. Moreover, as funds expand their AUM, the corresponding increase in fee income provides the financial flexibility to offer higher remuneration, thereby attracting new talent from rival funds.

While larger funds have long been known for providing attractive benefits such as gym memberships, dental care, and flexible holiday arrangements, a notable shift has occurred in the lower echelons of the industry. Smaller funds are now revisiting their benefit structures to align with industry standards.

The landscape of maternity and paternity benefits has undergone significant transformation. Enhanced maternity leave has become the norm, with 56% of surveyed funds offering maternity leave periods of four months or longer. In tandem, paternity leave policies are evolving, with 41% of funds reporting leave durations of three weeks or more.

While remuneration remains a crucial tool for staff retention, our clients are increasingly dedicating more time to managing career trajectories within their funds. The emerging generation of professionals seeks clarity on career progression, the key performance indicators (KPIs) associated with advancement, and the potential rewards on the horizon. We contend that this focus on career management is an increasingly vital tool for retaining talent, often surpassing the immediate appeal of pay and benefits.

Our Compensation Surveys

The PER Compensation Report has become an essential tool for the industry, benchmarking base, bonus and carry for investment, finance, accounting, HR and legal professionals.

Our unique perspective at the heart of private markets means we have valuable insight to share with our clients on compensation and wider trends such as the impact of hybrid working, actions being taken to improve diversity & inclusion, and hiring shifts in 2023.

Our salary surveys are for contributing firms only.  If your fund would like to participate, please get in touch with Charlie Hunt.

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