Private equity investors want the same talent responsible for past performance to lead future efforts, making team stability an important conversation during fundraising. However, a recent study by Capital Dynamics and the London Business School is turning that conventional wisdom on its head, at least partly.
Examining some 5,500 senior private equity professionals across 145 firms globally, researchers found that firms firing and hiring operationally-focused partners from one fundraising to the next do especially well. Turnover of financial professionals has relatively little impact on performance, while turnover of deal professionals was associated with weaker performance.
The findings validate some firms’ strategy of negotiating medium-term contracts with operating specialists – or those who use external consultants on an ad-hoc basis – to capture “value-add”.
Still, don’t expect the research to lead other GPs to begin following the same strategy in droves. When asked if the study might lead some firms to actively seek a minimum level of operating partner turnover in-between investment periods, multiple GPs speaking with PE Manager cited firm culture as an overriding factor.
When we hire someone, we assume it will be forever
“When we hire someone, we assume it will be forever,” said one GP. “We want them to have a career path.”
“It’s important to not instill the feeling that operating partners have a shelf life,” echoed a second.
Sources stressed that firms need to create an environment where all partners and employees, regardless of background, feel that they are part of one unified team. Giving the message either directly or indirectly that operating specialists are brought on for one specific project, portfolio company or fund can weaken that sense of solidarity.
The more practical takeaway from the study may be on LPs’ perception of operating partner turnover. The research provides evidence that, when a firm changes its make-up to bring in new operating-focused specialists, it has a beneficial effect on performance. In other words, some staff churn – the right kind of churn – can actually be a good thing.