A talent shortage is brewing at private equity firms and their portfolio companies.
Almost half (48 percent) of fund managers at private equity firms and operating partners described their organizations as understaffed, according to the latest report from BDO, an accounting and advisory services provider. Forty-nine percent of PE fund managers said they are experiencing a shortage of staff for critical roles, including chief financial officers, controllers, and treasurers. The employee challenges are a top concern for portfolio companies too, with 47 percent of CFOs reporting being understaffed in critical roles and 43 percent saying understaffing is a problem across their organization.
The results are based on a survey of 405 private equity fund managers and operating partners in the U.S., along with 200 chief financial officers at companies backed by PE firms. The survey was conducted in March.
The scarcity of talent has emerged at a time when talent has become a key driver for PE firms to transition from their traditional dealmaking model to one where they're squeezing more profits from the firms they already own. PE has been both poaching C-suite executives from public companies and expanding their efforts to hire from a more diverse pool to retain a younger generation of workers. About 20 percent of PE fund managers cite talent management as the value creation lever they deploy most frequently, according to the BDO report.
“Talent is a big issue,” said Jim Clayton, PE advisory national leader and PE national co-leader at BDO. A key factor behind the staffing shortage is the implementation of return-to-work policies by PE firms and their portfolio companies during the post-Covid period. “They were saying we’ll hire anybody anywhere during Covid. Now…they are trying to deal with this hybrid work environment.”
A major challenge is to find people experienced with market downturns. According to the survey, 60 percent of private equity CFOs started working in their current roles less than 10 years ago. “People in these jobs never went through the bad market in 2007,” Clayton said. “Anybody can make money in private equity in the last five to seven years because the markets were growing. But if you go back to 2007 and the immediate period after that, that’s when you worried about cash flow and optimizing debt costs.”
The staffing challenges are more pronounced at portfolio companies owned by larger funds compared to those backed by smaller PE firms. According to the survey, 60 percent of portfolio company CFOs owned by funds with more than $15 billion in assets said they are understaffed in critical roles. Only 45 percent of CFOs working at companies backed by PE firms with $3.1 billion to $15 billion in assets reported a simiilar sentiment. That figure dropped to 33 percent for CFOs at companies backed by funds with $1.1 billion to $3 billion in assets.
“There might be a disconnect forming between private equity owners’ perception of staffing levels compared with that of their portfolio companies’ perspective on their own staffing needs,” according to the report. “Perhaps the largest funds believe their portfolio companies over-hired in 2021 and 2022, as many of the largest tech companies did to hoard talent and gain scale, but now need to correct that mistake.”
