The private equity landscape is undergoing a significant transformation—whether it’s a temporary or enduring one is yet to be seen. As the industry continues to grapple with a slowdown in M&A activity, firms are adapting their strategies to remain competitive. There’s a great deal of discussion about how the traditional approach of relying on financial engineering and cost-cutting to generate returns is no longer sufficient. Instead, private equity firms are shifting their focus to value creation within their portfolio companies.
However, creating value is no easy feat, particularly in the face of a growing talent shortage. With nearly half of fund managers and operating partners reporting understaffing in critical roles, the competition for top talent is fiercer than ever. To succeed in this challenging environment, firms must develop effective strategies for recruiting and retaining the skilled professionals—in the C-suite and beyond—needed to drive growth and profitability.
The Changing Private Equity Landscape
Since the M&A boom ended in late 2022, deal activity has dropped in both public and private markets. According to Mergermarket, global private equity deals fell 33% in volume and 41% in value in 2023 compared to 2022. This decline can be attributed to a combination of high valuations and rising interest rates, which have made it more challenging for firms to identify and execute attractive deals.
These circumstances have made it more difficult for many private equity firms to rely on financial engineering and cost-cutting measures to generate superior returns. A recent Harvard Business Review article argues that the industry has entered a new era, one in which “investors can no longer buy an underutilized asset, pile on debt, and turn up the pressure.” The article highlights four key challenges that have altered the playing field:
- Despite having $2 trillion in dry powder, firms are struggling to find attractive targets, driving up prices and weakening the advantage of financial engineering.
- The rise in interest rates has made debt capital more expensive, placing a greater emphasis on improving operating performance to generate returns.
- An increasing number of private equity deals are now “platform” or “roll-up” plays, which require exceptional leadership and management skills to successfully integrate multiple smaller companies.
- Private equity funds are holding on to their investments for longer periods, partly due to the increase in roll-up strategies.
These challenges have compelled firms to adapt their approaches and seek new ways to create value within their portfolio companies, including operational improvements, strategic repositioning, and talent management to drive growth and profitability.
The Importance of Value Creation
Value creation encompasses a wide range of strategies and initiatives aimed at improving the operational performance, competitive positioning, and growth prospects of portfolio companies.
A few examples include:
- Enhancing operational efficiency through process improvements, technology adoption, and cost optimization.
- Expanding into new markets or customer segments through organic growth or strategic acquisitions.
- Developing new products or services to diversify revenue streams and capitalize on emerging trends.
The success of these value creation efforts hinges on the presence of talented operators who can identify opportunities, develop and execute effective strategies, and navigate the challenges of a dynamic business environment. However, the private equity industry, like most industries, is facing a talent shortage.
According to a recent report from accounting and advisory services firm BDO, 47% of CFOs at portfolio companies reported understaffing in critical roles and 43% indicated that understaffing is a problem across their entire organization. This has put many firms under increasing pressure to develop effective strategies for recruiting and retaining the skilled professionals needed to drive value creation and achieve their investment objectives.
Strategies for Recruiting and Retaining Top Talent
To ensure the success of their value creation efforts, private equity firms must adopt a multi-faceted approach to recruiting and retaining top talent. This approach should encompass both full-time and interim solutions, tailored to the specific needs and challenges of each firm and its portfolio companies.
When it comes to building and maintaining a strong internal team, firms should consider the following strategies:
- Emphasize the unique challenges and opportunities: Private equity-backed companies often face unique challenges, such as rapid growth, operational transformations, or complex mergers and acquisitions. By emphasizing these challenges and the corresponding opportunities for professional growth and impact, firms can attract candidates who are excited by the prospect of driving significant change and creating value.
- Offer compelling compensation packages with upside potential: To compete for top talent, offer compensation packages that are not only competitive in terms of base salary and benefits but also provide significant upside potential. This may include equity incentives, performance bonuses, or profit-sharing arrangements that align the interests of key hires with the success of the portfolio company.
- Create tailored talent acquisition strategies: Firms should work closely with their portfolio companies to develop tailored talent acquisition strategies that address their specific needs and challenges. This may involve partnering with a specialized executive search firm, leveraging industry-specific talent pools, and tapping into the firm’s network, including portfolio company alumni.
- Provide a compelling vision for the company’s future: Firms must be able to articulate a clear and compelling vision for the future of their portfolio companies. This vision should highlight the company’s growth potential, market opportunities, and the role that key hires will play in driving the company’s success. Offering candidates the chance to be part of a transformative journey can differentiate opportunities from those of other employers.
While building a strong internal team is crucial for long-term success, private equity firms must also be able to address immediate talent needs as they arise. This is where interim solutions come into play:
- Deploy experienced interim executives for critical transitions: When portfolio companies undergo significant transitions, such as a change in leadership or a major restructuring, firms can engage experienced interim executives to provide stability and expertise. These executives can help guide the company through the transition period, ensuring that value creation initiatives stay on track.
- Leverage functional experts for targeted projects: For specific value creation initiatives that require specialized expertise, such as a supply chain optimization or a digital transformation, firms can bring in interim functional experts on a project basis. These experts can work alongside the internal team to provide targeted guidance and support, without the long-term commitment of a full-time hire.
- Use interim talent to scale up quickly: When portfolio companies need to scale up quickly to capture new growth opportunities, interim talent can provide a flexible and cost-effective solution. By engaging interim professionals in key roles, firms can rapidly expand their portfolio companies’ capabilities without taking on the risks and costs associated with permanent hires.
By implementing a comprehensive talent strategy that combines full-time and interim solutions, private equity firms can position themselves to effectively navigate the talent shortage and drive value creation within their portfolio companies. The Townsend platform, which specializes in both full-time talent acquisition through Townsend Search Group and interim talent through Townsend Interim Solutions, provides our PE clients and their portfolio companies with a single-source solution for their talent needs. By leveraging Townsend’s extensive network of experienced professionals, industry expertise, and customized approach to recruiting, firms can access the right talent at the right time, ensuring the success of their value creation initiatives and maximizing returns for their investors.
Conclusion
As the private equity industry continues to evolve, firms that prioritize talent acquisition and retention will be well-positioned to succeed in this new era. The industry has become more competitive and crowded, with a record amount of funds chasing a limited number of attractive investment opportunities. This has led to increased pressure on firms to differentiate themselves and find new ways to create value.
In the long term, we expect to see a bifurcation in the industry, with a clear distinction between firms that can consistently create value through operational improvements and those that cannot. Firms that successfully navigate this transition will be well-positioned to capitalize on the opportunities presented by a more challenging and complex investment environment.
This will require a greater focus on talent management, as the ability to attract, develop, and retain top performers will become increasingly critical to success. Firms will need to invest in building strong cultures and capabilities, while also being open to new ways of working and partnering with external experts to access the skills and knowledge they need.
At Townsend, we have a deep understanding of the private equity landscape and a proven track record of helping firms identify, attract, and retain the talent they need to drive value creation. We are committed to being a trusted partner to the industry, providing the expertise and resources firms need to thrive.
