New technologies to improve investor relations, accounting and portfolio management processes have greatly benefited private capital in recent years. Now, we’re seeing the rise of private capital IT and operations that are not just aimed at portfolio companies that private equity or venture capital firms own or invest in.
For instance, we’re seeing investment in digital solutions that manage carried interest and compensation in a way that more fairly compensates fund accountants, whose long working hours often aren’t reflected in their payout, relative to the investment team. In using this solution, firms are also aligning themselves with a broader trend towards transparency in the industry – one that’s evident not only in new regulations, but in HR strategies for hiring and retention, too.
The rush to streamline operations and improve disclosure might make many on Wall Street uneasy about privacy and regulatory overreach, but research shows that transparency builds operational efficiency across organization types, and in particular, trust and loyalty among employees. That’s more important than ever, with fundraising hitting an all-time high and newly launched funds facing limited talent pools.
Triggers for streamlining
Complexity and a shortage of talent can often lead to innovation and streamlining.
In digital product development across industries, CTOs and CIOs are facing pressure to launch products despite a shortage of engineers even after recent layoffs in Big Tech. David DeRemer at app development consultancy Very Good Ventures writes that one result is that tech companies are giving up on having separate development teams for iOS and Android, for instance, and instead having single teams develop for both.
In the non-profit sector, which isn’t often considered a technology innovator, we see complexity leading to tech innovation for greater efficiency. When VF Corporation – the owner of Timberland, Vans and Dickies apparel – went beyond sourcing organic raw materials to seeking out materials from ambitious regenerative agriculture providers, that triggered a wave in agriculture tech among nonprofits. In Haiti, a new blockchain technology from The Data Economics Company has been launched to try to streamline the process of collecting and organizing complex data needed to understand if agricultural methods are actually helping land and communities heal. The Rockefeller Foundation has even started paying attention to see if the technology will work for food production, as well.
Now, private capital firms are also using tech to use tech to handle complexity amid a shortage of skilled accountants.
Pay for private equity managers has skyrocketed until recently, driven by the influx of new funds and the competition for qualified professionals. Apollo Global Capital, KKR & Company, Blackstone and Carlyle reported that their compensation and carried interest benefits packages more than tripled in the last year. Firms were adding staff – newcomers and veterans alike – at a blistering rate to address the growth. But somebody has to figure out all of the new complex incentive packages. It’s a task often laid at the feet of short-staffed accounting teams.
There’s a great deal of movement between firms, too. More than a quarter of 760 private equity, venture capital and corporate private equity firms lost a partner or a premium recruit to another firm in 2021, according to a J. Thelander-PitchBook survey. More than 40 percent of those went to a new firm; 16 percent started their own funds.
“We are seeing venture capital firms increase total cash compensation across the board, most notably among associates and managing general partners, indicating VCs are willing to pay a premium to recruit and retain top talent,” said Jody Thelander, a consultant who helped conduct the survey.
It stands to reason that everyone, from analysts to partners, in private capital firms are assessing their compensation packages and trying to figure out whether it makes sense to stick with their current job or brave the waters at a new fund.
Getting compensation right
Trying to calculate what partners are due used to be a difficult task. It was customary for yearly bonuses to be parsed out once a year — after year-end or in the summer — with professionals finding out how much they earned in a closed-door meeting, when the boss read off figures from a spreadsheet.
But the old approach no longer works for a number of reasons, not least that spreadsheets can be misplaced or leaked. Spreadsheets are fine if you are working with small, non-complex datasets, but firms with the desire and the capability to expand find them limiting. They can’t be emailed, to safeguard confidentiality, and so become quickly outdated, for example.
To stay competitive and appealing to investing professionals, private capital firms must invest in software applications that can assess overall awards, manage joiners and leavers, and ensure that new and existing employees are compensated fairly.
And for a small firm that plans to grow, there are nimble, scalable solutions.
In terms of employees, such solutions also accommodate another pandemic trend — working from home — giving employees access to information so they feel neither unmotivated nor alienated from their organization.
No one wants to have to wait for an email to find out about compensation, co-investments or health care reimbursements. Remote work necessitates an online, 24-7 portal. Automating the process also reduces the potential for human error in terms of calculating compensation and carried interest, replacing ad hoc exchanges with a dashboard showing calculations in real-time.
Making pay tansparent (and fair)
Removing the human factor also means reducing the chances that bias becomes a factor. Twenty-five percent of women in private equity are seriously considering leaving the industry because they feel as if they would make more money if they were male, Bloomberg reported. More than a third of minority professionals felt they would receive more compensation if they were white. Technology that helps solve these specific problems also gives management a tool to assess diversity, equity and inclusion via total firm analytics.
This is why transparency in reporting compensation and how it is calculated is essential. Employees who understand why they’re getting paid a certain amount and can track their progress are less inclined to think it’s unfair. Making salary, bonus and carried interest open and accessible for fund managers on a cloud-based platform might seem overwrought, but it affords transparency that has enormous benefits, especially for retention.
These “push-button analytics” on carried interest balances and scenario analyses on distributions help professionals understand their reasons for sticking with their current company.
Recent regulatory changes reflect concerns about transparency in private markets, as SEC Commissioner Allison Herren Lee explained late last year. The commission is promoting changes in reporting requirements that include mandates for much more detailed accounting of compensation, fees and other payouts.
The best solutions that help employees understand their carried interest, co-investments, health reimbursements and salary are essential to meet this new standard in transparency. They will also help retain workers by empowering them with knowledge and clarity.
Stuart Keeler is Managing Director, EMEA at PFA Solutions.