Can PE firms focused on purpose-driven investing do the same for hiring? (2024)

4. Engaging on ESG

One of the best ways private equity firms can tie employee experience directly to purpose is through engagement with increased focus on ESG, sustainability and impact investing. The last two to three years have seen PE firms implement a wide range of measures to better understand and communicate the social impact of their investments.

They’ve hired more professionals focused on ESG. In many cases, they’ve brought in senior roles that report directly to the CEO. In others, they’ve elevated mid-level roles. Blackstone, for example, recruited 12 individuals focused on sustainability in 2021 and plans further expansion in renewable power and real estate. Firms have also improved the economics of hires who specialize in ESG, offering healthy salaries and bonuses and in some cases carried interest in the funds.

Deal teams are increasingly being asked to factor ESG elements into their due diligence, even for deals where it’s not a primary driver of the investment thesis.

And firms are creating new pools of capital — impact funds and others — with a direct focus on managing a double bottom line. Apollo, Blackstone, Carlyle, KKR and TPG all have impact platforms now, whether in the form of dedicated funds or firm- wide strategies. All of these provide potential employees with the ability to connect with value creation that is more than just monetary.

5. Rethinking work-life balance

PE firms, like the rest of Wall Street, have long had a hard- driving culture that emphasizes toughness, long hours, and in-person interactions and training. But the pandemic has caused a rethink and created tensions between the historical way of working and employees’ desire for a healthier work life.

Some changes are relatively uncontroversial. CVC cites the impact of the pandemic on mental health and offers a program that emphasizes nutrition, sleep, exercise and mental health. It says it has found that the pandemic has increased people’s willingness to talk about their mental state, particularly among juniors without families.

When it comes to long hours, PE firms say they have the edge over investment banks, as they can tell recruits that burning the midnight oil is required only when big deals are brewing. Some firms have introduced “finish from home” policies — eat dinner or work out, then log in for a few hours at home instead of staying in the office all night.

PE firms are wrestling with the idea of work-from home/flex-day policies as they try to balance employees’ desires with long-held cultural dictates about face-to-face meetings, teamwork and apprenticeship. “We’re mindful that remoteness is helpful in reducing frictions like commuting, but we’re trying to balance that with how do you mentor and have informal relationships, being part of a team,” says one senior private equity professional.

A number of firms are experimenting with variations on this theme. One firm reported that it has implemented two flex days a week and tracks workload more accurately than it used to, counting how many boards people are on, for instance. Apollo tested two flex days a week in 2021 and allowed employees to work from anywhere for August 2022.¹⁴

Time will tell which firms gain a competitive edge — those that emphasize the teamwork, mentoring and career advancement opportunities that employees can gain in the office, or those that allow employees more control over their work schedules, thereby perhaps attracting better talent.

6. Rethinking engagement

To appeal to a broader range of talent, including diverse employees and younger employees, some PE firms are rethinking their culture, ranging from minor tweaks to new statements of firm principles.

Engagement surveys

Given that younger employees highly value being able to give feedback, some PE firms are collecting employee opinions via formal engagement surveys, aiming to take the pulse of employee sentiment. KKR highlights 90% participation in its annual engagement survey. CVC conducts “culture surveys” to ask people if they feel a sense of belonging and says it has a 94% participation rate. The practice appears to be gaining traction; according to Carlyle Group’s website, it recently completed its first employee engagement survey and is now developing concrete actions shaped by that feedback.

Giving junior employees a voice

Many PE firms pride themselves on their open processes for doing deals, and many are seeking to be more deliberate about giving junior employees a voice. For example, Advent International takes a consensus-driven approach to deal-making, while Riverside Company holds weekly “Meeting of the Minds” events where prospects, deals and current portfolio companies are reviewed and discussed in an open forum where everyone has a voice. Warburg Pincus invites junior dealmakers to its investment committee meetings. Blackstone, meanwhile, has long made a special effort to ask the most junior person in the room for their opinion.¹⁵

Emphasizing the “I” in DEI

Putting in place the resources to retain the diverse employees that firms are working so hard to recruit is a critical area of focus as well. Today, most large PE firms have employee resource groups for URMs. Some firms, such as Warburg Pincus, have also implemented diversity councils. Mentoring is also in focus, and here firms are getting creative. Warburg says it looks outside the firm to senior executives who are part of its network to help guide new URM and female recruits.

One tactic for retaining diverse employees is making sure they are included as deal leaders or voting members of the investment committee. Doing so may also help narrow the gap when it comes to equal promotions and compensation for women and URMs. Institutionalizing and formalizing the way promotion decisions are made can also narrow this gap. One approach to this is mentioned by TPG in its public filings ahead of its IPO: “integrating HR into performance reviews, compensation and promotion discussions to ensure equity and considerations of diversity.”¹⁶

7. Rethinking employee skill sets

Lifelong learning

Lifelong learning is another practice that has long been promoted at many corporations and is now becoming a more important component of PE firms’ toolkits. Many of the largest PE firms now highlight on their website’s opportunities for learning at their firms. KKR says that in 2019 it launched “KKR Avenues,” which offers employees new opportunities for long- and short-term positions across projects, teams and regions. TPG highlights Talks@TPG, which is “hosted by the firm’s senior leadership and [has] a focus on critical diversity, equity and inclusion topics as well as topics such as mental health, work-life balance and building resiliency.”

Upskilling managers

Managers who can provide (and accept) clear feedback and serve as mentors and role models are crucial to helping employees adapt and advance. But PE firms acknowledge that the best dealmakers do not always make the best mentors and managers. They want to change that with training aimed at strengthening managers’ skills.

One firm we spoke to, for example, asked its managers to talk about the best manager they ever had and distilled that information to show what it looks like when a manager is communicating effectively. Another is building a program focused on manager training in partnership with a university. The content will focus on giving and receiving feedback, how to think about manager style, inclusion, managing differences in a team, and change management. It envisions a series of intensive programs lasting two to three days with ongoing training in between.

8. Tone at the top

To enact cultural change always requires the visible support of top executives. This can be as simple as top leaders making public statements about the value of ESG or as complex as changing a firm’s investment statement. In one example, Oaktree in February 2022, added a new investment principle for only the second time in its history — that of responsibility.¹⁷

Can PE firms focused on purpose-driven investing do the same for hiring? (2024)

FAQs

How do private equity firms decide what to invest in? ›

Private equity firms want to see an ambitious and realistic business plan before investing in a company. Good sales and profitability prospects are essential, and the target company's facts and figures must support those forecasts.

What is the difference between an investment firm and a PE firm? ›

Investment banks tend to act as middle-man, marketing shares of publicly traded companies to other investors in a sell-side function. Private equity firms, on the other hand, invest their own money in a buy-side fashion in privately held companies.

What happens when a private equity firm invests in a company? ›

Private equity firms buy companies and overhaul them to earn a profit when the business is sold again. Capital for the acquisitions comes from outside investors in the private equity funds the firms establish and manage, usually supplemented by debt.

How do successful CEOs of PE owned businesses manage their business? ›

CEOs must foster transparent communication with investors, board members, employees, and external partners to instill confidence and maintain trust. Building strong relationships and managing expectations are critical components of this aspect of the role.

Does PE use DCF? ›

Key Takeaways:

The three main private equity valuation methods are: discounted cash flow, comparable company analysis, and precedent transactions. To get an accurate, court-defensible valuation, we recommend you work with a third-party valuation firm.

What is the average IRR for PE? ›

Targeted Returns

On average, private equity firms target roughly a 20% to 25% internal rate of return (“IRR”) and a 2.5x to 3.5x multiple on invested capital (“MOIC”).

Why would a PE firm buy a company? ›

Private equity owners make money by buying companies they think have value and can be improved. They improve the company or break it up and sell its parts, which can generate even more profits.

What type of companies do PE firms invest in? ›

Common Elements In All Private Equity Groups

Some focus on large companies; some focus on smaller, high-growth firms; some focus on lending (i.e., investing in debt rather than equity); and still others focus on infrastructure or real estate assets rather than companies.

Why would a PE firm take a company private? ›

First, one of the primary reasons PE investors like take-private transactions is because they allow near-complete control and influence over the investment. Many PE firms like to make majority or controlling investments because it allows them to make swift decisions and control the direction of the company's growth.

What is the downside of private equity investment? ›

High risk: Private equity investments can be riskier than public market investments. The lack of transparency and regulation in private companies can lead to unforeseen issues. Additionally, the success of these investments often depends on the ability to execute strategic changes, which may not always be successful.

How long do PE firms hold companies? ›

Private equity investments are traditionally long-term investments with typical holding periods ranging between three and five years. Within this defined time period, the fund manager focuses on increasing the value of the portfolio company in order to sell it at a profit and distribute the proceeds to investors.

Is Berkshire Hathaway a private equity firm? ›

In fact, much like KKR and other private equity companies, Berkshire Hathaway is indeed a source of investment capital from wealthy individuals and institutions for investing in and acquiring equity ownership in companies.

Does private equity beat the S&P 500? ›

As the chart shows, private equity funds have outperformed the S&P 500 over the long-term. In exchange for these compelling returns private equity investors give up the level of liquidity and transparency inherent to public markets.

How do private equity firms exit investments? ›

There are three traditional exit routes for private equity investors – trade sales, secondary buy-outs and initial public offerings (IPOs).

What is the minimum investment for private equity? ›

The minimum investment in private equity funds is typically $25 million, although it sometimes can be as low as $250,000. Investors should plan to hold their private equity investment for at least 10 years.

What do private equity firms usually invest in? ›

Private equity is ownership or interest in entities that aren't publicly listed or traded. A source of investment capital, private equity comes from firms that buy stakes in private companies or take control of public companies with plans to take them private and delist them from stock exchanges.

How do private equity firms value investments? ›

Most private equity managers rely on three common approaches to valuation: publicly traded comps, transaction comps, and discounted cash flow models. During significant market-moving events, private equity managers tend to be more conservative with their valuations.

How do private equity firms identify targets? ›

Value creation potential - Private equity firms will take a close look at the company's value chain and its ability to achieve growth, while also taking a market perspective on the potential of the company to expand into other growth and value creation streams.

How do private equity firms find deals? ›

How do private equity firms source deals?
  • Investment banks / M&A intermediaries.
  • Referral sources (attorneys, accountants, etc.)
  • Other private equity firms.
  • Management team sponsors.

References

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