Are You Focused On Attracting The Right Kind of Capital?

Sponsors today are increasingly concerned about how to raise their next pool of capital. The best performing funds continue to enjoy high velocity, even as they double in size or pursue adjacent strategies. Caution, however: market headwinds abound. The sell-side market appears to be softening and thus impacting DPI, fund marks and even the pace of fund launches and closes. While top decile GPs hold a single final close, the rest of the market is becoming increasingly bifurcated. LPs have significantly more investable options today with GPs delivering outsized returns across the community of top-quartile funds: when it comes to exits, 3x is the new 2x. At the same time, a fewer number of larger and stronger performing funds are crowding out middle-market GPs whose story is more on the come.

So how can you differentiate yourself? Demonstrate that your success is a function of the way your organization is run. Focus on leadership and human capital management.

Mission Moment

The private equity ecosystem is filled with smart, aggressive, and enterprising individuals. To succeed, however, you need to get the best out of your team members and align the skills and interests of your team with the firm’s overall mission. In an environment where GPs are struggling to differentiate themselves with returns alone and where LPs are increasingly concerned that a downturn is forthcoming, capital will flow to those organizations who can demonstrate a proven and repeatable model (or “system”) of success.

In the past, LPs were hypersensitive to potential red flags, such as concentration of carry or team turnover. Today, LPs still care about many of the same classic risk factors, however, they are just as interested in how you manage talent across the firm as a measure of your ability to deliver results. The battle for talent is fierce, and LPs recognize that those who can attract the best talent will ultimately deliver the highest results. As operating models become more complex, investment processes more sophisticated and macro/geopolitical environments more difficult to predict, LPs want to know that they aren’t just backing one individual, but rather an organizational system that can execute repeatedly, and successfully in any market environment. To do this, you need to identify your niche and approach and communicate the same to the market.

In many ways, the “platform system” that has long been associated with the likes of Goldman Sachs, Blackstone, KKR, (the New England Patriots…) is now coming to the middle market. LPs want to know that if you do lose a key individual, the entire firm is strong and what makes you unique from a sourcing or operating perspective doesn’t immediately break down with the loss of one individual – but instead, it’s the next man/woman up.

Take time to build consensus among the partnership and hone in on your key operational differentiators. The use of operating partners alone is table stakes today. Firms are increasingly specializing their in-house teams around data analytics, human resources, supply-chain management, sales and marketing, and other specialties. How you manage your team’s careers, promotions, training, and organize your decision making process are also key factors LPs diligence today in assessing the stability and potential for growth of your firm.

Diversify Your Team’s Mindset

Recent studies have shown that, more often than not, diversity equals outsized performance. But how should you approach seeking it out? Don’t focus on any one characteristic, but rather seek out candidates from different backgrounds with different mindsets. Focus on forward-looking trends and don’t be quick to rely on what has worked in years past. This will differentiate your firm’s thought-leadership in an overcrowded ecosystem of GPs.

Additionally, be prepared for the next generation of professionals to not always be interested in a traditional-style banking route. Increased awareness around flexibility and work-life balance continues to be an upward trend in the hiring market. Capitalize on this by loosening up where you can afford to.

Hire Intelligently Across Your Firm

While the investment team has been traditionally thought of as the crux of any PE-firm, it is crucial to focus your creative hiring efforts on other functions, as well. Ensuring adequate operational support for portfolio companies is vital as it signals to LPs that your returns aren’t a byproduct of the 10-year bull market. Hiring innovative investor solutions and corporate strategy personnel can take your firm’s expansion to the next level. We have even seen individuals whose sole responsibility it is to manage the firm the way you manage your portfolio companies. Think of this as an exclusively internally focused COO to manage firm operations unrelated to the fund.

Private equity has and always will be an ever-changing space; a holistic approach to building a winning team and culture guarantees that internal operations can run smoothly and allows the firm to focus on serving your LP base and portfolio companies. Nowadays, GPs run more like corporations rather than transitional entities. Each firm may be unique in their specific human capital needs, but one thing is certain: across the board, it is essential to stay competitive and creative in your recruiting process.