Ongoing talent woes are making it harder for PE managers to run their firms

PE firms are also struggling with operational efficiency and managing data, Crestbridge’s first mood index shows.

The fight to attract and retain talent shows no sign of abating, not only because of the macroeconomic environment, but because the industry continues to grow, according to Crestbridge’s first Alternative Managers’ Mood Index.

The fund administrator’s study found that 35.7 percent of respondents are still struggling with talent issues, and that they expect it to continue as an issue through 2023.

Alex Di Santo, global head of private equity for Crestbridge, said it is not surprising that hiring and retaining talent continues to be a top concern for private equity managers and, if anything, the problem is worsening.

“I think it’s partly just the growth of the industry. Irrespective of what’s going on in the macro environment, there’s still significant growth in alternatives and everyone’s competing for talent. And employees are becoming more fussy about which employees they work for, which is adding to the difficulties.”

Di Santo said more managers are allocating carry to all employees within their business, not just senior partners, to keep themselves competitive. Managers are also offering co-investments to employees to entice them to join the firm or to stay.

Where it isn’t possible to hire for a particular position, more private equity managers are looking to outsource middle and back-office functions, including financial reporting, compliance, and tax. Di Santo said private equity managers are also asking for additional assistance with ESG reporting or tech support from the admin.

More than one-fifth of respondents, 21.4 percent, also cited achieving operational efficiency as a top challenge. Operational efficiency refers to activities such as streamlining processes, improving communication within the business and finding ways to reduce costs.

Crestbridge’s Mood Index indicates that by optimizing internal processes and leveraging technology to streamline operations and reduce costs, investment fund managers can improve their competitiveness and increase their chances of success. However, this requires a sustained effort to identify areas of inefficiency, implement changes and measure results over time.

Managing data for both the business and investors was another challenge, cited by 14.29 percent of respondents.

The same proportion of respondents said the need to keep up with technological innovation in the industry is a challenge. This is becoming increasingly important as new technologies are developed that could potentially improve the efficiency of fund management processes.

And yet another 14.29 percent of managers surveyed said internal compliance was a concern. Considering the increasing complexity of the financial industry, it can be challenging for fund managers and their compliance officers to keep up with changing regulations and ensure that they are in compliance with all relevant laws and guidelines without interfering with business growth.

Increased due diligence on cybersecurity and ESG were also hot topics reported by fund managers.

Nearly three-quarters, 71 percent, of managers, said investors are focusing on cybersecurity processes during due diligence, and 57.1 percent said investors are focusing on ESG.

“Cybersecurity is an issue of growing significance for fund managers and their investors,” Di Santo said. “With the increased use of technology in the industry, fund managers are taking steps to protect their data and systems from cyber threats… and are expecting their business partners to do the same. Similarly, ESG continues to be a key consideration for investors and fund managers must be able to demonstrate increased commitment to ESG in order to attract and retain investors.”

Since managers are more often outsourcing functions, Di Santo said Crestbridge is also speaking with investors during their due diligence, especially when the firm is handling things like cybersecurity.

“Investors want to talk to us to understand what our culture is like, and turnover at our firm. They want to know what systems we use and what our cyber framework is like, so we walk them through our control framework and our controls report. Investors really want to understand the relationships we have with managers,” he said.