Talkin' 'bout my generation: millennials in private equity

Millennials are everywhere, surpassing generation X as the most populous generation in 1994, having overtaken baby-boomers just two years earlier. That has not been lost on businesses wanting to sell to them, as their spending power is set to exceed generation X's by 2020. But perhaps the greatest challenge associated with the rise of the millennial generation has been how to best leverage them as employees: depending on various sources, their contribution to the global workforce is estimated to reach between 35-50% by 2020.

Studies into the defining characteristics of the millennial generation have highlighted a number of differences with their predecessors – notably when it comes to expectations of working flexibility, greater work-life balance, a need for more constant feedback and the desire for faster career progression earlier on. Some of these traits would challenge businesses in any industry, but can seem particularly at odds with the methods and culture of private equity firms – which more often than not will have been founded and are currently led by baby boomers and members of generation X.

Gail McManus, the founder and managing director of private-equity-focused recruitment firm PER, says the industry remains somewhat shielded from these broader trends for now, given its niche nature: "Private equity is very interesting in that it hires very driven individuals to start with. These people will have worked incredibly hard to succeed at the academic level, which usually presupposes a strong work ethic. This type of profile naturally screens out some traits commonly associated with the millennial generation." The same point was made by other industry players, who specifically stressed how new joiners at larger and more institutionalised GPs are eager to get ahead and conform to the hard-work ethic seen as deeply rooted in investment firms.

Private equity has another advantage compared with investment banking – the financial services sector with which it naturally shares a potential talent pool – due to its more entrepreneurial nature and greater degree of flexibility. Graphite Capital managing partner Markus Golser highlights that private equity ties in well with millennials' desire to experience as many things as they can early on in their careers, for instance: "Within finance, private equity is still the job where you will try your hand at everything, from investment sourcing to crunching the numbers, deal-doing and then operational work. It makes young people into great all-rounders very quickly. There is value attached to that, which is taken into account by professionals at the beginning of their careers."

Furthermore, many firms acknowledge that despite most joiners not expecting a light schedule in private equity, a better work-life balance is something they have had to take into account in recent years – albeit within the constraints of a workload defined by intense crunch times on tight deal deadlines. Golser notes that Graphite aims not to be prescriptive in the way the team members structure their days, instead relying on trust and the accountability that comes naturally with working within a small team of investors.

This is something that also resonates with Charles Ind, managing partner at Bowmark Capital: "Autonomy is ultimately more important than the simple number of hours worked, and we at Bowmark would prefer to judge performance on output rather than input. As long as people realise they have to put in the hours when it counts, you have to be flexible in the quieter moments and allow individuals to make the best use of that time."

Winds of change
It is not necessarily all good news for private equity, though. Flexibility is something that now cuts across most generations in the workplace, as businesses were quick to realise the productivity gains and greater employee satisfaction that could be achieved by enabling it. Younger professionals from the millennial generation, and perhaps to an even greater extent from the following generation Z, are after a lot more than just being able to leave the office at 5pm on Fridays and work from home once a week.

Once these young professionals have joined, their approach is different too. McManus highlights how they increasingly want more freedom in the way they can progress, strongly value a meritocratic approach, and put diversity in the workplace among their chief concerns. "They also tend to favour a more involved approach to their career progression, and will value the opportunity to receive frequent feedback on what they could do better or differently. It is really not just about ploughing on and waiting for the bonus cheque," she says.

Frode Odegard is the founder and CEO of the Post-Lean Institute, a Silicon Valley-based consultancy advising businesses on managing disruption. He argues that the younger generation's expectations of free-flowing information, fostered by the technology they have grown up with, is a much more radical transformation businesses need to consider. "Millennials and post-millennials are the first generations that have grown up with access to any information they want at their fingertips," he says. "They have a much higher expectation of finding information rapidly, and sharing and discussing it openly. When they get to work at a private equity firm and information does not spread as quickly, and the autonomy to act on it is more limited, there is a discrepancy."

To illustrate his point, Odegard recounts a meeting at a mid-cap private equity fund: "One of the younger partners was very receptive to implementing post-industrial management methods and turning portfolio companies into disruptors. The CEO of the firm, who was older, essentially shot him down and you could see the enthusiasm clearly draining from the younger partner."

The issue is particularly acute given the competition private equity faces for top new talent – not just within the industry but increasingly from outside of it. Within the investment space, venture capital and impact investment funds, for instance, can appeal to millennials and generation Z more than institutionalised buyout firms. "The VC market is growing, and taking talent that would have gone to more traditional private equity firms in recent years," says McManus. "This could be due to a number of factors: first, graduates have a desire to be involved in something that is new, growing, and making an impact. It is not just about money. The firms' cultures and working environments play a role too; working in a thriving hub in the East End with a more informal culture appeals more than a tower block in Canary Wharf."

It goes beyond that, though. The technology space can also offer young professionals the opportunity to work in a business whose culture and impact they feel closer to. Says Bowmark's Ind: "Businesses in that space offer two things that help attract people, and especially younger professionals: the ability to have much more responsibility earlier on and more autonomy; and, perhaps more importantly, the idea of being part of something impactful that will play a bigger role in the world."

It is possible to get bright young people that will conform to your existing company culture. But in the end what you are missing out on is cognitive diversity" – Frode Odegard, Post-Lean Institute

Private equity and financial services face increasing outside competition for the talent pool, which incidentally has a much greater awareness of the possibilities available to them and a greater willingness to advertise themselves, thanks to the rise of platforms such as LinkedIn.

In that context, outside observers such as Odegard and McManus urge GPs not to overlook the risk that comes with ignoring a potential brain drain away from private equity, or only seeking out joiners that already fit in the established culture. "It is possible to get bright young people who will conform to your existing company culture," says Odegard. "But what you are missing out on is cognitive diversity, which is ultimately what you are trying to achieve by pursuing greater diversity in general."

Widen the net
Fortunately, GPs already seem receptive to the idea of widening the net by building different recruitment and engagement models. This is particularly the case at the smaller end of the market, where a number of players emerged in the aftermath of the financial crisis, already aware of the need for a different approach to human resources. Nicola McQuaid, an investment manager at NorthEdge, says the firm is determined to attract talent from diverse backgrounds. "There is a lot more to do in this area, but progress has been made over the past few years," she says. "We are also developing partnerships with institutions across various backgrounds. At university level, we work with Manchester Business School and Leeds University to host private equity competitions that educate students on the industry and, in turn, enable us to meet potential applicants from across the country."

Synova is another firm that wanted to build a different type of business at inception in 2007. Founder David Menton says that trying to attract a broad range of talent is a key part of that culture: "We pride ourselves on leading the charge for the recruitment of graduates, as well as investment professionals. In addition, we have a programme for identifying sector specialists – both from academia and industry – at all levels to support our sector teams. More recently, and to supplement our skill base, we have added a former head-hunter with dedicated technology sector experience to the team."

Encouraging diversity is only part of the challenge though, and McManus advises GPs to think about employee engagement in order to allow these individuals to thrive – from doing regular internal surveys to promoting mental health and general wellbeing. The latter is becoming increasingly crucial in trying to foster the sort of working environment that will allow private equity houses to compete with organisations that would initially appear more in tune with the expectations of the millennial generation.

Again, change is already afoot in that respect. Turnaround firm Endless, for instance, runs an informal mental health mentoring and coaching programme to help its investment team deal with difficult situations. Meanwhile, NorthEdge ran its first ever employee survey at the end of 2018. As part of implementing some of the changes suggested in the discussions, the firm intends to roll out training on its brand values and culture. But McQuaid also says that the GP is looking to address the perceived lack of transparency in private equity that may deter new joiners or even discourage established professionals: "Changing old-fashioned culture and unacceptable behaviours has been a challenge across the industry in recent years. At NorthEdge, we will be providing every staff member with support and guidance on speaking up, as well as giving and receiving helpful feedback to ensure that our environment is as welcoming and inclusive as possible."

Money (That's What I Want)
Company culture aside, private equity naturally remains attractive to driven individuals, motivated by the prospect of personal reward and hands-on operational experience. With younger professionals increasingly eager to progress more quickly in their careers and putting a heavier emphasis on personal agency, the industry can also look to leverage its built-in advantages by offering greater autonomy and clarity on the path to the top.

The elephant in the room remains compensation, and specifically carry. The deferred nature of such a large part of the financial appeal of private equity can be seen as being at odds with the perceived impatience of younger professionals – especially at a time in the cycle where both holding periods and funds' lifespans are being stretched. Synova's Menton says this was an important consideration for the young firm when it was founded: "From the outset we have worked hard to ensure – beyond annual compensation – that carried interest is awarded at all levels of the team, and not just limited to the senior executives." Bowmark has also made efforts to integrate carry in its efforts to attract and retain talent in the current landscape: "We tend to award carry quite early, which gives younger professionals comparable economics to tech firms, where the option to get equity relatively early on is there," says Ind.

Beyond efforts to tweak the model, the rise of alternative structures such as deal-by-deal funding in recent years can be seen as a way to bypass this particular idiosyncrasy of private equity. But some in the industry, such as PER's McManus, argue that the younger generations' desire to play the field in their early years, before settling on a firm whose values and prospects they gel with, means the lure of earlier carry can be hit-or-miss.

The issue of agency and personal responsibility is perhaps a more pressing one. Following up on his comments around private equity remaining an attractive step up the career ladder for young professionals, Graphite's Golser adds that new recruits must feel like more than anonymous cogs in a rigid machine: "As an employer, you have to give them that flexibility, that freedom early on. You cannot approach that in a narrow way and just give them modelling work non-stop. They will lack the experience at first – and I think most younger private equity professionals realise that – but it is all about giving them the opportunities."

This is something Bowmark has kept an eye on too, says Ind: "Long gone are the days when people slave away at thankless tasks for 10 years until they can finally do the same to people underneath them. That has completely changed in recent years and we have been very focused on that. We try to give people more opportunity to develop their skills earlier, on the frontline: they should go out into the market, meet advisers and business owners and build relationships. You cannot keep that just to the top of the firm."

Despite the shifts already underway – be it a more transparent company culture, greater workforce diversity, a more hands-on career path or even quicker financial rewards – private equity houses still face an uphill battle in trying to attract the best of an increasingly selective talent pool. But the risk of failing to engage with the millennial and post-millennial generations looms large, especially given the uncertainty around what the next cycle may bring. Says Odegard: "The very model of private equity could be disrupted – if there is something in the value chain that is not transparent, not efficient, then it risks being taken over by technology. The industry is also still backward-looking to some extent, especially in the way it relies on past performance to justify future investment and value-creation strategies. You need greater cognitive diversity and younger people joining the firm to start changing that."

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