Can private equity develop the talent to thrive in the digital economy?

Autor: EY Global

Ernst & Young Global Ltd.

5 minuti lugemine 26. aprill 2018

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  • How can private equity transform into positive equity?

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Private equity firms must attract and retain top talent as private equity founders age and the pace of digitalization accelerates.

Despite private equity’s (PE) very well-established position as an engine of the global economy, even the oldest firms have only been around a few decades. And for many of them, the founders are still in charge. But as the old guard approaches retirement, it’s time to hand over the reins.

Our latest report on the future state of PE, How can private equity transform into positive equity? (pdf), found that succession planning within this environment requires a balance in retaining culture and dynamism while simultaneously addressing new business realities — such as the need to close the emerging digital skills gap.

Passing the leadership baton

“The PE industry is still very personalized, and not very institutionalized,” said David Bonderman, Chairman and Founding Partner, TPG, in our report. “Most of the big businesses are still run by their founders. There will need to be a generational change over time.” Some PE firms have traditionally operated as an extension of their founders’ personalities, with business and investor relationships intimately tied to those individuals.

How can these firms persist without their founding leaders setting the vision? Being able to bring on the most diverse and dynamic talent will be critical for PE firms — but these newcomers will also need to understand and reflect the companies’ overriding purpose and culture to ensure continuity and maintain trust.

Rewarding talent

One major talent challenge will be getting compensation right. “We saw that there was an enormous amount of inequality within the groups,” said Harvard Business School Professor Josh Lerner in our report. “Typically, for larger firms, the founder got at least twice as much carry as the average senior partner.”

This leads to instability and high turnover. “Groups with more inequality tend to be less stable,” Lerner explained. “Partners with good track records but a lower share tended, not surprisingly, to be footloose. Losing senior partners ultimately hindered these groups’ ability to raise additional funds relative to their peers.”

Creating compensation systems that not only reward top performers, but do so equitably, will be key to attracting and retaining the next generation of top talent.

Disrupted business models

Additionally, at a time when the next generation of PE leaders is being identified, it is increasingly important that firms begin to seek not only diverse but specialized talent — particularly around technology. Many of our report participants insisted that addressing this skills gap was crucial for PE firms to survive in the future.

"If you were to point to an area of financial services ripe for disruption, you could say this one,” says David Rubenstein, Co-Founder and Co-CEO, The Carlyle Group, in our report. “We are using essentially the same business model we’ve used for 40 to 50 years."

If you were to point to an area of financial services ripe for disruption, you could say this one. We are using essentially the same business model we’ve used for 40 to 50 years.
David Rubenstein,
Co-Founder and Co-CEO, The Carlyle Group

This new talent may well have to come from a younger generation, says Rubenstein in our report: “Almost every industry is disrupted at some point. Eventually, people — probably in their 20s or 30s — will come up with a better mousetrap. And when they come up with it, it will probably transform the industry.”

“We see technology disruption across almost all our portfolio companies,” says Shane Feeley, Global Head of Private Investments, CPPIB, in our report. With PE so focused on identifying areas for adding growth or value, it’s vital for them to understand the nature of this disruption. Increasingly, that will mean having people who understand digital and emerging technologies, and know how to spot the difference between a potential unicorn and a turkey.

The need to think digitally

As in so many sectors, this means PE firms need to think digitally if they are to survive and thrive.

“To deal with this will mean bringing on more digitally-savvy talent, as the leaders interviewed for our report point out. Yet despite years of warnings about digital disruption, many PE firms don’t current have a Chief Digital Officer [CDO] and often still delegate responsibility to IT and marketing,” notes Glenn Engler, EY Americas Digital Strategy Leader. He says that “the potential impact of digital disruption on the portfolio companies runs much deeper than most PE firms realize.”

To help PE meet the challenges and make the most of the opportunities of the digital era will require a new generation of CDOs who can build focused digital strategies. These strategies will in turn need to focus on two key skill sets:

  1. Assessing future potential: PE firms operate by seeing value ahead of the curve. This means they need digital talent that can truly understand the potential of new technologies. “It’s like investing in electric cars or anything else,” says Bonderman in our report. “You have to be digitally literate to understand the business.”
  2. Adding value: PE firms also profit by helping businesses in which they invest become more effective at what they do. In the fast-paced world of digital, with start-ups growing to vast valuations in record times and threatening established businesses, this will also require the right talent — both for cost-cutting to remain lean in the face of new start-up threats, and to identify focus areas and develop business models (something which many start-ups still struggle with) to stay ahead of these threats.
    Amid digital disruption and the anticipated changing of the guard leadership across many firms, the PE industry is uniquely positioned to capture new ideas and find unexpected paths to growth with the next generation of talent.


As PE firms begin their leadership succession planning, harnessing digital talent play a key role in creating new routes for growth.

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Autor: EY Global

Ernst & Young Global Ltd.