Are you exploring the future or just visiting? Are you exploring the future or just visiting?

Authors
Andres Saenz

EY Global Private Equity Leader

Trusted advisor to leading private equity professionals and their portfolio companies. Ardent student of consumer behavior. Marathoner. Family man.

William (Bill) Stoffel

EY US Private Equity Leader

Transformation leader in private equity at Ernst & Young LLP. Loving husband and father to four teenagers. Avid history reader. College basketball fan.

Mike Lo Parrino

EY Americas Financial Services Organization Private Equity Leader

Private equity veteran bringing the broad power of EY to the clients. Relationship builder. Problem tackler. Avid gardener.

Kyle Burrell

Ernst & Young LLP US FSO Assurance Partner

Looks forward to serving clients at a high standard. Enjoys taking on complex challenges and collaborating with others to come up with the best solution.

Jeremy Foss

Ernst & Young LLP US FSO Assurance Managing Director

Resourceful, adaptable and reliable leader of assurance teams.

Jeff Belaief

Ernst & Young LLP US FSO Assurance Senior Manager

Determined leader of assurance teams serving wealth and asset management clients. Problem solver. People manager. Passionate about family, friends and sports.

10 minute read 1 Feb 2021

Our 2021 Global Private Equity Survey shows that private equity firms navigated the challenges of 2020 relatively well, but they can’t stop now.

In brief
  • The economic aftershocks of the COVID-19 pandemic touched virtually every organization around the world, and private equity firms were no exception.
  • Over the last two years, private equity managers have consistently ranked asset growth and talent management as their top two strategic priorities.
  • Investors no longer see investments based on environmental, social and corporate governance as a trade-off.

Private equity (PE) chief financial officers (CFOs) have addressed numerous challenges over the past few years as they have moved beyond the traditional role of finance executive. But until 2020, they had yet to be tested by a crisis as profound as the COVID-19 lockdowns, which forced firms, investors and target companies alike to shift to virtual operating models overnight.

PE firms and their CFOs made the move to a remote working environment with relative ease, thanks in large part to the foundation they had built to revamp their operating model and modernize their IT infrastructure. Those past decisions helped CFOs successfully navigate the disruption of the COVID-19 pandemic, confirming that they had the digital tools and mindset to set up virtual investor meetings and conference calls as they continued to raise capital and identify target companies.

While investment activity dropped slightly in the second and third quarters of 2020, overall private equity activity barely skipped a beat, which stands as an incredible achievement considering the adjacent social and political uncertainty the US and the world faced in 2020. At the same time, their back-office operations also adjusted to the new workflows and continued to meet critical milestones.

Now, as they look to 2021 and the future, CFOs say they are planning to double down on their past bets in technology and people and to continue expanding their scope to focus on new areas such as sustainable investing and to further initiatives in diversity and inclusiveness (D&I). Indeed, the ability for CFOs to stake a leadership role to help their firms navigate a rapidly changing landscape of the private equity industry has never been more important.

As they look to the future, CFOs say they are planning to double down on their past bets in technology and people.

  • Background and methodology

    The purpose of the EY 2021 Global Private Equity Survey is to record the views and opinions of executives and heads of finance at private equity firms around the globe. Topics include the impact of COVID-19 on the private equity industry; talent management; process improvement, including technology; trends related to environmental, social and corporate governance; and the future landscape of the private equity industry.

    From June to October 2020, Greenwich Associates conducted telephone and online interviews with managers from 127 private equity firms. In addition, we also interviewed 72 institutional investors representing some $1.8 trillion in assets under management.

Man in a red jacket is lying on the transparent ice on lake baikal
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Chapter 1

COVID-19’s impact on private equity, now and in the future

The economic aftershocks of the pandemic touched virtually every organization around the world, and PE firms were no exception.

In the short term, most firms adapted successfully to a remote working environment. The long-term impact on the PE industry as well as its portfolio companies, of course, is still unfolding. In this new environment, the private equity CFO and finance team have an opportunity to act as agents of change and take advantage of the opportunities the pandemic has presented and influence the future of work in their organization.

The COVID-19 pandemic accelerated the digital transformation of private equity firms by forcing them to operate in a remote environment. Firms that had yet to challenge the flexibility of their workforce had no choice. CFOs, for most firms, noted that the transition was fairly seamless as they were already moving to create more flexible remote work arrangements. This enabled them to quickly adapt their work setting, including office size, layouts to accommodate social distancing and office locations. Forward-looking firms recognized this as an opportunity to improve and redefine their operating model. At the same time, firms also had to quickly shift to virtual investor meetings, including annual meetings with limited partners, adding another layer of complexity for connecting with existing and new investors in the pandemic environment and beyond.

Supporting a remote workforce and enabling large-scale virtual meetings require state-of-the-art technology. Private equity firms’ major investments in technology over the past five years positioned them to respond promptly to these challenges. Firms that could leverage the technology in the back office to manage the remote workforce were better equipped to weather the storm.

Looking ahead, CFOs said they would continue to reinforce technology investment and adjust flexible work schedules as they took further actions to enable a remote workforce. Firms should rightly view this as a successful return on investment and focus on building upon their success to guide how their organization operates in a post-pandemic environment.

Firms with a forward-looking lens also took steps to sustain firm culture, develop and train their people, and monitor mental health of employees.

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Chapter 2

Talent, management and operations

Over the last two years, PE managers have consistently ranked asset growth and talent management as their top two strategic priorities.

While other areas of focus such as environmental, sustainability and governance (ESG) and technology-related priorities may emerge or ebb and flow, most organizations believe that finding and retaining talent that advances their strategy and business model remains a key factor to succeed at asset growth.

In comparing results of this survey with prior surveys, we observed a slight shift in the priorities at the overall organizational level to the talent management front. In the past, managers’ top priority for talent management focused primarily on enhancing middle- and back-office processes. Now that technology and processes are in place, firm managers are focusing more on applying talent management as a lever to drive employee productivity and engagement.

This largely reflects the success of the efforts of private equity managers to deploy technology or process initiatives over the past two years, which has allowed private equity managers to redirect their focus to their people. While gender and ethnic minority representation were focuses in the prior year, private equity managers have shifted even more to address the composition of their talent pool with regard to gender and underrepresented minorities.

In addition to diversity initiatives, private equity executives oftentimes maintain responsibility for determining which functions should be performed in-house. For various reasons, more managers have begun to shift various core, routine functions into outsourcing arrangements, which continues to be most prevalent for the fund accounting and tax functions. This is especially true of smaller firms that may have financial constraints that challenge their ability to have a large and robust internal workforce of which larger, more established private managers have the luxury.

However, private equity firms of all sizes are showing more comfort with outsourcing the traditional and more routine back-office functions, while still displaying resistance to using outsourcing providers in front-office functions such as portfolio analytics. As private equity managers continue to grapple with fee pressures and increased competition, however, the option of using outsourced providers for front- office functions might also be an area of opportunity for savings.

Private equity managers will need to focus even more time and attention on improving the representation of underrepresented minorities in both the front office and back office.

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Chapter 3

Environmental, social and corporate governance

Investors no longer see investments based on environmental, social and corporate governance as a trade-off.

Investors are no longer willing to accept weaker performance related to more ethical investment decisions as they will increasingly seek to build well-performing socially responsible portfolios. Roughly half of investors surveyed currently invest in ESG products and almost half of investors expect their ESG investing in private equity and venture capital to increase over the next two to three years. Only about half of the investors surveyed felt that there were enough ESG offerings to meet their needs. As such, ESG offerings are likely to continue growing to keep pace with investor demand. This partly reflects an evolving investor base that is more conscientious about how its behaviors, including investment activities, can lead to better social and environmental behaviors.

Many investors attracted to ESG strategies believe that this strategy will tap into investments that outperform the general market. In addition, more people — particularly millennials and Generation Z — consider social and environmental impact a key element in their investment decisions. While managers in Europe and Asia are meeting this demand, managers in North America are lagging behind, though we anticipate an effort to catch up. There is increasing evidence that ESG investing may enhance performance, which puts firms that fail to offer ESG strategies at a further disadvantage as investors seek more sustainable investing options.

Investors no longer see investments based on environmental, social and corporate governance (ESG) as a trade-off. In other words, they are no longer willing to accept weaker performance related to more ethical investment decisions.

Summary

The year 2020 brought major challenges to private equity executives due to the disruption caused by COVID-19. As our survey reveals, the job of private executives continues to be one that challenges them on all fronts, but even in the most disruptive of environments they continue to lead and focus on their firms’ strategic priorities.

About this article

Authors
Andres Saenz

EY Global Private Equity Leader

Trusted advisor to leading private equity professionals and their portfolio companies. Ardent student of consumer behavior. Marathoner. Family man.

William (Bill) Stoffel

EY US Private Equity Leader

Transformation leader in private equity at Ernst & Young LLP. Loving husband and father to four teenagers. Avid history reader. College basketball fan.

Mike Lo Parrino

EY Americas Financial Services Organization Private Equity Leader

Private equity veteran bringing the broad power of EY to the clients. Relationship builder. Problem tackler. Avid gardener.

Kyle Burrell

Ernst & Young LLP US FSO Assurance Partner

Looks forward to serving clients at a high standard. Enjoys taking on complex challenges and collaborating with others to come up with the best solution.

Jeremy Foss

Ernst & Young LLP US FSO Assurance Managing Director

Resourceful, adaptable and reliable leader of assurance teams.

Jeff Belaief

Ernst & Young LLP US FSO Assurance Senior Manager

Determined leader of assurance teams serving wealth and asset management clients. Problem solver. People manager. Passionate about family, friends and sports.