We are regularly approached by investment associates with two or three years
of private equity experience who are thinking about moving to another fund. They
feel they have gained enough experience and industry insight to take their talents elsewhere.
They aren’t yet fine-tuned investing machines, nor are they top originators but they have just enough deal knowhow to be taken seriously by other funds, and they are eager to see what the rest of the market has to offer them.
And they are in demand. For every ambitious associate wondering if the grass is greener, there are probably two or more firms looking to hire someone just like them: and with the promise of fast promotion to VP and the prospect of carry, some will make the move.
From the point of view of the hiring fund, associates who are already demonstrating their aptitude for private equity by having executed on a small handful of deals will go straight to the top of any shortlist.
Consequently, if you want to keep the people you have just spent the last two or three years training, then you need to take positive steps to retain them.
It is vital that the scope for progression is made clear to your associates so they can visualize their own future within your organization; this is probably the most important factor needed to prevent your team members from seeking out greener pastures. The people that come and talk to us tell us that they feel there is a glass ceiling, which they may be unable to breach, or they feel that progression is linked to time served rather than ability or value-add. Or it might just be that no-one has given them any feedback to let them know they are valued.
Sometimes, they feel that the amount of exposure to deals they are getting leaves more to be desired, and so positioning themselves in a smaller fund with a more streamlined team dynamic may make more sense. You can quench their deal hunger by ensuring that they build up their skills and experiences over a number of transactions whilst gaining increasing ownership of significant parts of some of the smaller deals. On a practical note, this also makes it hard for them to engage in a serious recruitment process if they are busy on an exciting and challenging project!
So are career progression and professional challenge the only drivers for leaving – or does compensation fit into the picture somewhere? After all, investment professionals are generally financially driven. Whilst remuneration is rarely the only element in change-seeking behaviour, dissatisfaction with financial reward can play its part. The most common scenarios we hear about are related to perception of their compensation relative to the market and, importantly, to their colleagues. Sometimes mis-information underpins both of these perceptions.
One way to minimise compensation dissatisfaction is by demonstrating that your base, bonus and longer-term incentive schemes are around about the market rate for similar sized funds. There isn’t much you can do if you are in a mid-market fund and your associate is comparing their bonus with a large LBO fund, but you can perhaps point out that the personal impact they will have within that fund is likely to be reduced.
Being clear about how bonuses have been determined can also be helpful, as can minimising differences between junior team members. If they have done the same job then they should be paid the same irrespective of the investments they have worked on. If you want to communicate a performance message, good or bad, then do this clearly in a discussion and don’t risk mis-interpretation of bonus numbers. There is nothing worse for morale than a larger bonus going to a team member who through ‘luck of the draw’ worked on a successful opportunity.
Providing clarity on your carried interest schemes and long-term incentive plans should also be part of your regular discussions with your junior team. If they aren’t in a scheme they need to know when they will be as the lure of entry into a carried interest scheme can be a pull factor to leave. And if they are in a scheme with you, make sure they understand what it means in terms of reward. Schemes are often undervalued in the minds of the recipients.
All these considerations are exactly the issues that you should be addressing with your talented team. You selected them for their highly motivated and driven character, so don’t be surprised if they are highly motivated and driven to do the best for themselves, inside or outside of your organisation.
So if they still want to move on, perhaps to a new sector or a different environment, then facilitate the transition in an efficient and dexterous manner. A positive transition is favourable to both parties, and retains market good will.
Do get in touch if you want to chat through any of this. We can help you understand the demand in the market for different levels of experience, identifying where you might be exposed and we can help you benchmark compensation against your peers. We’d be delighted to talk.