The past year has shown some signs of a looser labor market, but the reality is that many firms are still struggling to source and retain talent. In January, EY’s Global Private Equity Survey found that 65 percent of CFOs at firms with AUM of between $2.5 billion and $15 billion ranked talent management as their top priority, even above fundraising, and 56 percent of CFOs at firms with more than $15 billion in AUM agreed.
As tempting as it may be to blame the talent crunch on broader macroeconomic factors, the private funds industry, especially its operational staffs, face some intrinsic difficulties, including a dearth of new accountants coming out of college. Many firms are devoted to improving diversity as quickly as possible, but it has become obvious that it will take time to develop a truly diverse talent pipeline. However, the toughest part of talent management is retention.
Compensation will always play a major role, but firms are taking a far more systemic approach to building a firm that people want to join and stay at for years to come.
‘Culture’ may be a nebulous term, but many shops are actively building a culture of collaboration and mutual respect. And CFOs are finding unorthodox ways to keep their staff engaged and evolving, with a mix of special projects, mentors and clear processes around evaluation, promotion and professional development.
“Innovation doesn’t always come from the top”
Leadership development is a key component. “This year, we’ve done more leadership development, more 360 talent assessments for private equity firms, than any other year,” says Dan Hawkins, CEO of strategic leadership advisory firm Summit Leadership Partners. “And that’s because they’re held to a higher standard as leaders these days, when the fact is, many of them were never trained to be leaders.”
This is especially true of many CFOs, who were tapped for their financial acumen, but have found their role evolving into the strategic leader of the firm’s operations. Despite this, most have embraced talent management as part of their duties, even as it has become more difficult, with one CFO finding it dwarfs the time they spend on many of their traditional responsibilities. And that difficulty is driven by factors that are largely out of their control.
For example, diversity and inclusion efforts are a priority in hiring, but they do not exist in a vacuum. “The [private equity] industry is working to build a diverse talent pipeline, but the reality is that this may take time, even generations,” says Hawkins. “And now, diverse candidates from top schools have tons of options, and want to see people like them as partners and principals, and that’s still rare.”
There isn’t just a lack of diverse candidates, but candidates of any kind. “Since the new CPA requirements, which include five years of college, there’s simply fewer people pursuing that,” says Jeff Schneider, the COO of Victory Park Capital. “And while we don’t hire folks straight out of school, it’s still shrunk the pool of possible hires.”
No matter what the labor market is like, geography always factors in access to talent. One CFO reported they turned over half their team in the last year. They had little trouble finding candidates, given their New York location, but this meant staff had plenty of options to leave for a better opportunity.
Although, for firms facing vacancies in smaller markets, it’s hard not to envy Manhattan’s talent pool. NewSpring Capital is located just outside Philadelphia, and when its CFO, Mike Kubacki, was hunting for a new controller this year, he had to get proactive.
“That hire grew out of our network, and she had several years’ experience with private equity on the audit side, which is hard to find out here,” says Kubacki. “But besides that hire in June, we’ve had to tap recruiters to find folks that fit the team.” And even if the candidate has the right skills and experience, the success of their tenure may come down to something that has little to do with their actual responsibilities.
No one disputes that a firm’s culture matters, but that cliché can be stubbornly hard to articulate beyond canned phrases around teamwork. Yet, such tropes are not irrelevant to winning and, even more importantly, keeping talent and even improving operations.
“Innovation doesn’t always come from the top,” says Kubacki. “We encourage everyone, no matter the title, to share their ideas about ways we can streamline a process or add additional rigor to what we do.” Still, when most refer to a winning culture, it’s when daily behavior matches the values found on the firm’s website.
“We don’t believe in stepping on each other’s shoulder to get to the next level,” says Schneider. “We grow and succeed collectively, and that’s proven in how we promote and manage our team. We frequently refer to our culture as the VPC family, and it shows in how we treat one another.” Most recently, that effort got recognized when Victory Park Capital landed on the list of Crain’s 100 Best Places to Work in Chicago, an award based exclusively on employee feedback.
The way to build a winning culture is not simple or obvious. For example, HCI Equity, a lower mid-market manager, makes certain that work-life balance factors into its activities, but the firm’s CAO, Lisa Costello, notes that there are complexities around remote work. “The shift towards remote work, while offering flexibility, poses challenges in maintaining a strong organizational culture, fostering collaboration and ensuring effective communication.”
Squaring those kinds of circles are precisely what is required to build a culture that keeps the best employees. But even the most supportive cultures can’t do it all, especially when it comes to the core issue of talent management today: retention.
“The biggest challenge to retention isn’t compensation,” says Kevin Gasque, COO, CFO and CCO of Greycroft. “It’s creating a development plan and career path for high performers.” With so few routes for promotion, CFOs find that their most talented staff come with an expiration date.
“Some folks may not want to be controller or CFO, and they’re happy with the work-life balance that comes with staying in the same position for their career,” says Kubacki. “You can have employees at your firm for a long time. Even though an individual may not rise up to the controller level or greater, their experience is invaluable to the team, to the firm and especially to me.”
But no CFO can count on building a team only of people happy to stay where they are for decades. As a result, they’ve been looking at creative ways to develop talent and offer opportunities for professional growth. “There is definitely a ceiling for finance professionals in our industry, so that takes some ingenuity to find routes for development,” says Gasque. “But the first step involves identifying the high performers that will be the most eager to grow over time.”
One solution Gasque suggests is when one mid-level staffer leaves, giving their responsibilities to one of the high performers, along with perhaps hiring a new employee to handle the lower-level duties that are part of the combined role. This gives the ambitious staffer the chance to learn more and develop leadership skills that are relevant if they want to become a CFO themselves.
Kubacki also sees the value in giving high performers authority over a given process. “Even if there’s no new title, if that staffer is suddenly in charge of producing the financial statements or negotiating credit lines, they’ll be engaged and motivated by that new responsibility.” He’ll also look at rotating responsibilities around staff, so that each team member is well-rounded.
Multiple CFOs also suggest that as the firm grows into new strategies and business lines, they can select their best and brightest to head up the responsibilities for that debut credit fund or new infrastructure vehicle.
Giving the firm’s finance stars their own fiefdoms can do plenty to keep them engaged for years to come. And they stress the value of formal mentoring programs to help employees make the most of these opportunities.
But there’s another secret to retaining talent that can often get lost in the shuffle: transparency. “We make a point of being fully transparent around the opportunities for professional development and advancement, so that employees can see a future with us,” says Costello.
CFOs stress that it is important to take the time to inquire about an employee’s interests and ambitions and share ways the firm will help address them. They suggest doing this as standard practice during performance reviews, so it doesn’t fall by the wayside in the wake of everything else that’s on their plate.
The AI era of talent
Artificial intelligence may be scoring headlines with promises of utopias or apocalypses but discussing the role of AI in talent management is less hyperbolic. “We do think about the role of automation and AI in terms of what we do,” says Greycroft’s Gasque.
“There’s no doubt that in five years, we’ll be see some efficiency gains around portfolio data aggregation, reporting and valuations, and I can see working with a smaller team, but there will always be a very hands-on human capital element to the private equity and venture capital business.”
That means the issues around sourcing a talented, diverse team who are willing to stay with the firm for years will not be going anywhere any time soon.