Changing, slowly

On how the next generation of private equity superstars might change the industry.

Will private equity look significantly different in a decade's time? It's not an easy question to answer. This is an industry that largely consists of private partnerships managing long term capital; conservatism abounds, and change tends to be a slow process (at least internally).

But perhaps the best clues as to the future shape of private equity can be gleaned from the up-and-coming generation of younger dealmakers, who by then will presumably be among its leading lights. And as we discovered when we spoke to several of them for the cover story of this month's magazine, they tend to have slightly different values and priorities to some of their predecessors – which is likely to have consequences for the industry as a whole.

It's clear that private equity is a very different proposition for those entering it today, at least relative to 10 or even 20 years ago. Scrutiny from politicians, regulators and the general public is at an all-time high. Financial rewards are probably harder to come by (and will almost certainly take longer to achieve). There's a much greater premium on operational value-add. The firms themselves are more institutionalised. And of course, social attitudes continue to evolve.

We wondered whether this has affected the sort of people that are now attracted to the industry – or the way that junior investors think about their futures.

The answers of those we spoke to were interesting. Evidently they're still motivated to make lots of money (particularly after the recent lean years); and the consensus was that private equity is still seen in the top business schools as a highly lucrative and attractive line of work. But money isn't the be all and end all. The under-30 newcomers are generally in favour of more transparency and openness, not least as a way to improve their industry's reputation. And they profess to care about the social and environmental impact of their investments.

Clearly it would be simplistic to suggest that all of the younger generation are ethically motivated, or that none of the 'older' generation is so inclined. But there does seem to be more of a consensus among this next cohort of dealmakers that making pots of money is not an end in and of itself. The magazine should be hitting your desks next week, but you can read a sneak preview of the feature online HERE.

One cause that is likely to benefit from this growing consensus is responsible investment. To be fair, this is already an area where the industry has made great strides in a relatively short time. As recently as three years ago (when we published our first ever Responsible Investment supplement) this still felt like a fairly niche subject, of interest to arelatively small minority of professionals within the industry. But now – at least at the more progressive groups – ESG considerations have become central to the investment process.

Indeed, at EVCA's Responsible Investment Summit in Brussels this week, the association's chairman George Anson suggested private equity was “the poster child for responsible investment”. Self-congratulation is a dangerous thing, but it's indubitably true that private equity's governance model is very well suited to facilitating responsible investment practices.

That said, the battle isn't won yet. Although there was plenty of useful discussion about policy and taxation in particular, the Summit highlighted the challenges of trying to translate the well-meaning principles into the sort of concrete data points and KPIs that private equity loves. As Doughty Hanson's head of sustainability Adam Black tells us in our fourth annual Responsible Investment Special (which is out next week):”I can't always turn around and say: 'This is how much value we have secured; this is what the number is'.”

Of course, that's not just true for ESG issues; it can also apply to other areas of operational improvement too. And the good news (we'd argue) is that the next generation of dealmakers does at least seem likely to attach greater importance to the sort of negative externalities ESG excellence helps to avoid – not least because society as a whole is starting to do so too.