Private equity firms will lose the talent war if they don’t think beyond compensation when recruiting the next generation of leadership.
High salaries and benefits are no longer the top factors driving younger people to the private equity industry, according to the latest PE report from Ernst & Young, which is expected to be published on Thursday. Ninety percent of younger professionals ranked opportunities for personal growth before money, according to EY.
The report is based on a survey of current students and recent graduates of Columbia Business School’s Private Equity Program. Eighty-four percent of respondents who have chosen to study private equity said high compensation is important part of any job in the field. Although that’s still a high percentage of respondents, pay has become a little less important factor for the current cohort than for previous ones, according to the report.
Compensation now ranks below other factors because the people attracted to the sector take it as a given that they will make a high salary in exchange for the demands that the jobs place on them. “Compensation will only go so far as a motivating factor,” said Pete Witte, EY's Global Private Equity Lead Analyst.
Compared to their predecessors, younger PE staffers are more attracted to a work environment that’s conducive to intellectual and personal development.
“Millennials were more deliberate in choosing an industry than Gen X, which tended to take jobs based on whatever they thought was the best available option at the time,” Witte said. “[This] is pretty intuitive. Millennials have access to better information in order to make highly informed decisions than Gen X did when they were entering the workforce.” GenX’ers were born between 1965 and 1980; Millennials between 1981 and 1996.
Diversity will also become a new battlefield for private equity firms when competing for top people. According to the EY report, tech giants and start-up companies are now among the biggest recruiters at Columbia Business School, which suggests that PE firms are competing with other industries for the same pool of talent. But compared to the tech sector, private equity has historically been even less diverse. Hiring programs at private equity firms have exclusively targeted people in banking, consulting, legal, and accounting, where women and people of color are generally underrepresented.
Rami Cassis, CEO and founder of Parabellum Investments, a private equity firm, agrees that the industry needs to incorporate a more diverse pool of talent. He argues that people with backgrounds in marketing and human resources would be excellent operating partners for PE firms, but few have been employed as key decision-makers in the industry due to a bias against people who have never worked in legal or finance.
“Everybody generally sticks to the same way in the private equity industry. That’s an indisputable observation,” Cassis told II. But moving forward, firms that employ a more diverse pool of talent will have an edge over their competitors, he added.
Donna Hitscherich, a senior lecturer and director of the private equity program at Columbia, said that research has shown that diverse teams make better decisions and generate higher returns in the PE industry. “Also, in our experience, the [limited partners] have been looking for diversity in the funds in which they invest,” she said.
“Employees increasingly want to work for employers that share their values, and diversity is a key element of that,” Witte noted.