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Friday: The waning power of carry

With carried interest losing its appeal, co-investments could be the key to retaining young talent, said panelists at Invest Europe's CFO Forum in Valencia.

On Fridays, we focus on insight relating to human capital, outsourcing and CFOs.

Rod James, senior reporter at our sister publication Secondaries Investor, was at Invest Europe’s CFO Forum in Valencia this week. Here are some of his key takeaways from the event.

Getting to graduates

Private equity is rarely the first job destination for graduates, rather something they stumble into a little later. The impetus to change this is growing strong, though. Actively recruiting at the university level will not only help the industry stand out in a competitive employment market, but not having to wait for talent to trickle through the system will also help firms meet their diversity targets more quickly.

Retaining talent with co-investments

In a maturing market, many younger professionals aren’t willing to wait a decade for the big pay-off. One way of addressing this is to use leverage to allow younger employees to buy into co-investment opportunities, allowing them to benefit quickly from any upside, said Brendan Dolan, European finance director for HIG Capital.

“At HIG and at some of our peers, it’s become more common to assist junior members of the team with co-investments through some sort of loan arrangement or third-party financing,” he said. “It’s not confined to the investment team. There’s a developing view that it is important to look after people in the finance team as well.”

Regulators to look at leverage

Many on the GP and LP side felt that leverage will come under greater scrutiny in Europe and the US. While short-term borrowing doesn’t count as leverage for the purposes of regimes such as AIFMD, growing noise around the subject and a general clamor for more financial regulation suggest that six- or 12-month facilities might not be exempt for much longer.

“If it continues like in the last two years and leverage is used more aggressively or becomes more expensive, I assume the regulators will look into it,” said Daniel Gregor, head of controlling at Allianz Capital Partners.

Inexperienced investors and the next recession

Recent years have seen an influx of new investors into private equity. Panelists at the forum spoke of having to explain how drawdowns and distributions work, that no checks are necessary, as well as the finer points of fund accounting. A true test of their suitability to the asset class will come with the next recession, said Timo Strunkmann-Meister, head of fund operations with Capital Dynamics.

“It’s my firm belief that most LPs are not doing PE, because they want to but because they have to, because as a public pension fund there’s no way you can achieve the returns to pay your pensions by sticking to bonds and less risky investments… It will be interesting in the next downturn when they realize they can’t get out.”

This letter was prepared by Rod James. Were you at the CFO Forum? Which issues caught your attention? Contact the author