Strengthening retention with transparency tools

Competitive pressures, regulators and clients have been driving a push toward automation and transparency in private capital. Now, as fundraising and new fund launches continue at record levels, that focus is turning to retention. Staying ahead of the curve today means looking inward to tackle an often-overlooked source of competitive pressure – your own professionals.

People in private equity, venture capital and other private fund firms like to dream of greener pastures, wondering if they could be better compensated elsewhere. Giving them better access to information about their compensation and carried interest, however, might make them more reluctant to stray and help the firm keep their best talent – and, therefore, its competitive edge.

In recent years, relying on cloud-based and software-as-a-service (SaaS) products, financial firms have been accelerating the automation of many of their operational tasks to save money, reduce errors and become more productive and efficient. These forces have helped firms transform into focused, data-driven operations that prioritize success.

While speed and scale are part of that transformation, teams of professionals need to remain paramount in leaders’ minds. As financial firms increase transparency and data operations to serve clients better in investor relations, accounting and portfolio management, some are beginning to think about how focusing internally on human capital with specialized tools makes business sense.

Transparency through digital platforms

From recruitment to retention, one way to leverage the latest digital tools is to make compensation and carried interest more transparent for professionals in an industry where talent is hard to retain. The smartest, most ambitious people are always on the lookout for better opportunities.

“No matter how they’re engineered, such tools send a message that management cares about everyone in the firm”

An increasing number of private capital firms have been investing in digital portals to digitize the delivery of documents and dashboarding to enhance efficiencies, controls, and for compensation details. These portals track elements such as compensation, carried interest, bonuses, co-investments and management company ownership; offer employees access to their data and analytics; and enable them to digitally sign and acknowledge their receipt of compensation statements and other documents.

Platforms can also include forecasts that allow employees to see their future earnings potential and their vested and unvested carried interest awards. These are key for employees who may be contemplating whether to change firms, and who want to know the impacts of doing so.

“Leaner teams that are managing compensation and carried interest are often struggling to keep pace”

These digital systems replace the error-prone, labor-intensive spreadsheets and document-merge processes that lack the capacity for advanced analytics. But the shift doesn’t have to happen all at once. Some firms phase in automation slowly, with an eye toward long-term, broader use. Many start with allocations, vesting schedules and carried-interest reporting, and then add an employee portal, carried-interest forecasting, co-investment tracking, as well as base and bonus compensation to produce aggregated reporting and analytics.

No matter how they’re engineered, such tools send a message that management cares about everyone in the firm.

Working remotely – or not

The pandemic brought automation and digital processes to the fore. And digital platforms are, without question, ideal for remote work, too. But we’ve also seen the rise of additional pressures on employees and firms, including the increased poaching of talent and, most recently, the Great Resignation. As a result, the leaner teams that are managing compensation and carried interest are often struggling to keep pace.

“The smartest, most ambitious people are always on the lookout for better opportunities”

Firms that deploy “push-button analytics” help professionals know where they stand. Virtual dashboards don’t require emails or calls to partners or human resources – a new normal that administrators are now adjusting to. Such options may cater to remote employees, but they’re attractive to people working in the office as well. Everyone wants to make informed decisions about the relative advantages of their career path and associated economics.

Dealing with the SEC

The Security and Exchange Commission has long left private funds to fend for themselves, secure in its view that large investors needed fewer protections than small ones. But in February, the SEC announced a proposal that would force private-equity funds and others to provide more disclosures to their investors, including quarterly statements detailing fund performance, fees and expenses, and manager compensation.

A related proposal would also require private equity advisers to file current reports within one business day of certain significant events. If enacted, these rules will put significantly more pressure on compliance teams.

This new focus is prompting private capital, venture capital, hedge funds and other organizations to move quickly and transparently. The SEC’s changes could make talent acquisition even more competitive. Firms that can spell out compensation clearly to their professionals, however, will be more than prepared.

Ryan Burger is vice-president, Product Strategy & Solution Delivery, at PFA Solutions.