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Private Equity Movement: How Investors and Managers Are Scaling for Growth

The private equity industry has seen unprecedented success over the last few years. According to McKinsey & Company’s “Global Private Markets Review 2019,” 2018 was the third-highest fundraising year on record which resulted in new capital of approximately $778 billion. In addition, the value of private equity deals reached a new high at $1.4 trillion. AUM hit yet another all-time high at $5.8 trillion – the key question then is how are investors and managers scaling for growth? At EisnerAmper’s 4th   annual Alternative Investment Summit in New York, a panel of private equity experts, including Pam Hendrickson of The Riverside Company, Michael Ranson of Blue Wolf Capital, Vikrant Sawhney of the Blackstone Group and Christopher Sugden of Edison Partners, discussed their experiences and insights on matters to consider when scaling a private equity business. Some topics included building and managing the investment team, fundraising dynamics and the role of technology.

Seesaw balance: For the deal team to fly high, operations must hold the ground

The panel kicked off with a discussion of current operational challenges facing private equity firms. Attracting and retaining talent is one of these hurdles. Firms have been making more effort to bring diversity to their teams, and people with different demographics such as gender, ethnicity and experiences have proven to add value. In attracting talent, it is important for firms to focus on public outreach to illustrate the positive impact private equity can have on communities – not to mention the firms who direct capital towards investments associated with the good of the public and environment. In retaining talent, it is important for the team to feel that they are part of the success of the organization which at times may include a vested financial interest. The current workforce is primarily made up of millennials who yearn for higher value and a sense of contribution. As a result, firms have been incentivizing investment professionals and management with carried interest to achieve this sense of participation within the organization. This notion supports awarding people for their collective contribution to the firm’s growth, as opposed to solely the individual’s contributions.

Growth has also helped private equity firms evolve and enhance the way they manage their operations teams. In scaling a business, it is important to identify efficiencies that will foster the ability for growth. One way is to identify areas that can be appropriately and effectively outsourced.   One of the panelists emphasized the effectiveness of outsourcing, as long as monitoring exists in order to maintain quality control. This can be a viable option for emerging managers that have limited resources and where their operational support team members have multiple responsibilities. As firms grow and raise more capital, outsourcing non-business-essential functions will provide managers with access to additional resources, such as people and technology. This will enable the managers to focus on what they are meant to be doing, which is achieving capital appreciation for their investors, and focus less on day-to-day operations.

Excel: End of an era?

As private equity firms continue to strengthen their investments in technology, the industry itself is experiencing significant digital transformation. Use of spreadsheets as a one-stop-solution to all business functions are no longer practical. The panel collectively agreed that the implementation of technology is crucial to all aspects of the business, including investor communications. The panel also talked about using artificial intelligence to monitor various relationships, whether for fundraising or deal sourcing.

In their closing thoughts, panelists emphasized the importance of effective communication as a key to scaling a private equity business. It’s the simplest way to bring people together and foster a culture of openness and transparency. Also, when managing growth, private equity firms should not lose focus on their core principal values. Last but not least, succession planning is an important part of successful scaling for growth and can often take a fund’s life cycle to effectively implement and should be considered throughout the growth progression.

To check out our blog series from each panel from the EisnerAmper 4th Annual Alternative Investment Summit, please click below:

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Ms. Sussman is a Senior Audit Manager in our Financial Services Group. With nearly 10 years of accounting, audit and operational experience, she provides services to private equity funds, venture capital funds, hedge funds, funds of funds and investment advisors.

Ramya Bala is a Financial Services Group Senior Tax Manager serving asset management clients, including private equity funds, hedge funds, funds of funds and investment advisors.