The future of work: 5 predictions for private equity firms

Firms need to adopt innovative practices to drive more lucrative deals

May 27, 2020
Labor and workforce COVID-19 Private equity

As businesses around the world consider how they return to work amid the coronavirus pandemic, private equity professionals are already making plans for widespread changes to their workforce.

Like other businesses, private equity firms have limited nonessential travel, closed offices and imposed strict limits on in-person contact.

But it has come at a cost. In an industry that relies on speed and innovation to close deals and drive returns for investors, this absence of face-to-face meetings is one reason that M&A activity in the private equity sector has had the most sudden drop-off since the Great Recession.

Now, private equity firms must transform quickly—a challenge that companies in the broader economy are facing. According to RSM’s second quarter Middle Market Business Index survey, 70% of middle market executives are encouraging employees to reduce or restrict face-to-face meetings, and 52% won’t allow travel outside the United States.

The results were based on a random survey of 416 senior executives, conducted from April 8 to April 23, including respondents in manufacturing, retail, technology, and fintech.

Source: MMBI Q2 survey, RSM US LLP

Source: MMBI Q2 survey, RSM US LLP

The future of private equity work is changing by the day, and innovative practices are needed to drive more lucrative deals.

Here are five lasting changes for private equity firms that will follow COVID-19:

1. People remain your No. 1 asset

Private equity firms already attract the best and brightest in corporate America, including top performers from Fortune 500 companies and elite banking firms. This won’t change. But the methods taken to do so will. Virtual interviews will need to include aptitude tests to measure critical thinking skills, learning ability and problem-solving.

Determining emotional intelligence will be equally important to establishing the type of trust that will be needed to work alongside management teams in a remote setting. LinkedIn, for example, is expanding its curriculum to engage more of its users with soft skills that private equity firms will need.

2. Data is becoming increasingly important

Data handling has the chance to revolutionize deal-making. Without having the benefit of physical access to evaluate company performance, analysts will instead look for alternative data sources to determine the areas of greatest earnings impact.

Alternative data sets will reveal strategic movements within companies and help track when companies are hiring or firing employees, interacting with customers, moving product and other metrics that offer insight into a company’s performance.

Visualizations will be important to affect the conclusions that otherwise were made during in-person meetings. And adult learning has become cheaper and more effective thanks to new technologies such as microlearnings, simulations, virtual coaching and gamifications.

3. As talent disperses, offices fade

Investment managers will stretch for talent outside of their geographic region as the in-office workforce diminishes. Areas like New York, Chicago and San Francisco have long been the hotbeds for finance talent, but that will change as private equity staffs increasingly work outside of concentrated urban neighborhoods. Firms will find that lavish office spaces—used for events like pop-in investor meetings—are overly costly, and the firms will instead opt for remote work options.

RSM’s survey results show that 66% of employers have asked employees to work remotely. Employers will offer home office stipends to accommodate multiple screens, standing desks, printers and scanners. New employee benefits that encourage wellness will be the score that employees look for to encourage more stay-at-home working.

4. The fluid workweek and gender diversity

Private equity has a culture for competition that is not easily compatible with family life. Private equity professionals managing parental responsibilities amid the pandemic have learned to schedule around other commitments. This is difficult and trying—especially as parents manage home schooling—but a positive aspect is that men and women are sharing child care duties more regularly.

One likely result of remote working is that more women may be able to adopt a fluid work schedule while still caring for children. And that may be one additional way for funds to differentiate their strategies as many believe in the benefits of female-run teams for generating alpha.

5. Outsourcing will grow

Limited partner and regulatory requirements for greater transparency are driving the need for substantial investments in technology, which middle market firms aren’t always willing to make. Not all general partners have the ability to make those investments and will instead look to advisers who can.

As the risk of cybersecurity breaches rises, lean private equity firms will focus on the privacy of its front-office deal functions and leave back-office responsibilities to the outside firms. Human resources, fund administration and regulatory compliance will be one less worry for investment managers looking to make deals.

The takeaway

Stay-at-home orders have sidelined nearly all of the private equity industry in the United States. But private equity is filled with bright and sophisticated people. And although the coronavirus has upended deal flow in the near-term, deal-making will go on—it just may look different.

RSM contributors