EY annual survey: Permanent change in PE afoot

Private equity firms’ operating models may have changed permanently amid the pandemic and priorities have meaningfully shifted, according to EY’s annual Global Private Equity Survey, previewed by Private Funds CFO.

The 127 private equity CFOs, COOs and financial executives globally that responded to the survey expect that, in functions across the firm, around a third of the time employees spend working will be done remotely, even after covid-19 conditions subside. Respondents said that employees in compliance and regulatory reporting functions will spend the most time working remotely (35 percent of their time), while investment professionals will spend the least (30 percent).

The large majority of firms, regardless of size, expect their operating models to be moderately “transformed as a result of insights gained during covid-19.”

Most manager respondents (66 percent) said remote working has resulted in only minimal disruption to all investor relationships (80 percent of investor respondents echoed this sentiment), though 30 percent of managers said it has majorly disrupted prospective relationships, but has had a minimal impact on existing ones.

Managers were somewhat split on whether the impact covid-19 has had on marketing activities is permanent or temporary. Forty-three percent of respondents think the shift is here to stay, while 47 percent think marketing activities will return to normal. Another 10 percent said there has been no change at all.

At a presentation of select results during Private Equity International’s CFO All Access virtual event last week, which was held under Chatham House rules, one CFO of a large private equity firm said that remote work conditions had resulted in an “enormous” uplift in productivity by employees. They said challenges have resided in staying connected with employees and preventing employee burnout, and that getting people back into the office will present its own significant challenges. People “are happy working from home,” the CFO said. “It will be hard to bring them back.”

The CFO added that the firm had tried to bring some junior employees who had moved out of state back to the office and “it ended in fireworks.”

Only 30 percent of respondents said that lack of productivity was a major risk of a more remote workforce, while more than 75 percent said that the inability to train employees as quickly as before and provide important mentoring, as well as the deterioration of firm culture, are major risks.

That rise in productivity noted by the CFO partly explains why “improving employee productivity” dropped from by far the highest priority of respondents in 2020’s survey to the second-highest, below “increasing gender representation,” in this year’s survey. Increasing ethnic minority representation and creating a more inclusive culture ranked third and fourth on the list of priorities, respectively.

Kyle Burrell, partner at EY, said that CFOs’ focus on advancing technological development, outsourcing more functions and redesigning workflows in recent years has facilitated the shift in priorities. “Because of all the work that the CFO has put in over the past five years, you’re seeing a shift away from [productivity] being the number one priority to other things such as increasing gender and ethnic minority representation, creating more inclusive cultures,” he said. Widely covered unrest and disillusionment over racial and gender inequality issues, especially in the US and particularly in the last year, also likely contributed.

D&I: Long way to go

But that shift in focus has yet to produce meaningful results industry-wide. From the 2020 to 2021 surveys, the proportion of women in front-office roles at respondent firms only increased marginally. An increase of only 1 percent of firms said that 30 percent of their front-office employees are women. Meanwhile, there was a 6 percent increase in the number of firms that said at least 30 percent of back-office employees are women. Forty-six percent of firms said that 50 percent of their back-office roles are performed by women.

Progress on ethnic diversity has also been slow. Around 75 percent of respondents said that less than 10 percent of their front-office employees comprise underrepresented minorities, while 60 percent said minorities represent less than 10 percent of back-office staff.

While firms with more than $15 billion in AUM display a greater representation of underrepresented minorities than smaller firms, the report’s authors noted that “managers of all sizes have a long way to go to increase diversity.”

Most respondents (74 percent) said they have launched or are launching some kind of diversity and inclusiveness initiative, but of those initiatives, many are informal (42 percent). EY’s Burrell believes that should change. “I think implementing formal DNI initiatives and programs is going to be important to improving those statistics,” he said.