Private Equity Firms Think the Best Investment Is . . . Themselves

After a record-breaking year of fundraising and deal making, PE firms are looking inward.

Amir Hamja/Bloomberg

Amir Hamja/Bloomberg

It’s time for private equity firms to get their own houses in order.

According to the latest 2022 Global Private Equity Survey by Ernst & Young, private equity firms will be focused over the coming year on talent management, product expansion, and their ability to incorporate environmental, social, and governance research. After a year of rapid growth, private equity firms are moving toward an “institutional mindset,” a natural step for any maturing industry, according to Kyle Burrell, a partner at EY.

Large players in the private equity market are especially gearing up for the next stage of the PE lifecycle. Last year, more than half of PE firms with over $15 billion in funds completed a strategic transaction, including acquisitions of other firms, selling non-controlling interests or GP equity, and financings through debt or equity. Thirty-five percent of such firms say that they plan to offer ESG products to investors, up from 26 percent in 2020. At least 80 percent of funds with more than $2.5 billion assets under management have prioritized diversity and inclusion in their talent management schemes, according to the EY report.

Larger firms are growing assets under management at a faster rate than the smaller ones, Burrell said. The bigger companies are more likely to adopt an institutionalized operating model, and they usually have enough resources to develop forward-looking strategies. For example, 68 percent of PE firms with more than $15 billion in assets plan to increase racial diversity. That compares with 56 percent of PE firms with assets between $2.5 billion to $15 billion, and 54 percent of those below $2.5 billion. The difference is often a resources issue — smaller firms typically have smaller management teams, which lack the capacity to implement talent management policies, Burrell explained.

Burrell added that PE firms are taking a strategic look at their own operations, due in part to record-breaking valuations. The industry is growing so fast that any missteps that might harm brand value could be painful. Key market players now need to have “dedicated personnel for financial planning and analysis to help with strategic decisions,” detailed reporting frameworks to track key performance indicators, and independent risk and compliance departments, Burrell said.


The report noted that in the next stage, private equity firms are likely to raise funds from wealth and retail channels. “We are seeing changes in technology, [such as those that allow] fractional share ownership,” Burrell said, adding that recent regulatory policies have also made the private markets more accessible by lowering the net worth requirements for individual investors.

“This forward step in maturity is part of the natural private equity lifecycle. More firms evolve from smaller organizations that manage a handful of funds into larger, more complex financial institutions with responsibility for multiple portfolio companies and the growing alternatives allocation from investors,” the report said.