Inside the GP: Keeping junior happy

GPs are having to find new ways to retain younger talent — from providing them with senior mentors, to loaning them money so they can invest in the funds they manage.

Most twenty-somethings today don’t have a brokerage account, or easy access to a programme that can help them finance their dream starter home. But those working at HGGC do.

The California-based mid-market firm leverages its relationships with external service providers to offer junior dealmakers and staff various perks, including mortgage assistance or tax planning. This starts during the enrolment process, when the firm’s HR department walks new joiners through the different programmes that HGCC has arranged.
“If we can offer them access to services they may not otherwise have on their own, why not do it?” says Richard Lawson, the firm’s co-founder and chief executive.

As an industry, private equity is having to pay ever closer attention to recruitment and retention strategies. Over the last decade, a group of industry-specific headhunters has emerged, making it relatively easy for rival firms to poach up and coming talent – often via a simple cold-call.

What’s more, an inability to retain talent tends to go down badly with investors and can harm a firm’s chances on the fundraising trail. In fact, retention and succession issues are, respectively, the second and fifth biggest concerns for LPs during the fund manager selection process, a Private Equity International survey of institutional investors revealed last year. So fund managers have to raise their game.

To mentor or not to mentor

One strategy a number of GPs use is a mentor programme that pairs associates or principals with a partner who takes responsibility for their growth at the firm. Firms adopting this approach say that mentors can provide regular feedback and develop a more personal bond with associates, which can give junior staff a greater sense of direction and personal comfort within the firm.

“At HGGC each associate has someone responsible for telling them on an ongoing basis three things they are doing fantastic, three things they need to work on and one thing where they are just killing it,” says Lawson.

Finding a mentor for an associate is not without its challenges, however. “In this industry, senior deal partners aren’t always on board with taking on an active mentor role,” says Kristen Laguerre, chief financial officer of early-stage investment firm Atlas Venture. “They’re either too busy, don’t know how to do it or expect the junior people to be self-driven.”

Based on her experience, Laguerre recommends an alternative, less direct, approach. She says the firm should create an office culture where questions are encouraged, and associates feel at liberty to discuss their work and career progress with senior partners. Doing so allows associates – who can be instructed to be proactive in soliciting guidance – to pair off naturally with a partner who they respect and is receptive to their needs.

 At Atlas, office events are planned to further encourage dialogue between junior and senior staff. “We play basketball every Friday. The senior partners seem to have an easier time fitting that into their schedule,” says Laguerre. “And it provides the associates a chance to create a friendly rapport with their managers.”

Speaking of office culture, the firm’s internal organisation can be a significant factor in someone’s satisfaction at the firm. Frog Capital managing partner Mike Reid describes an experience during his time with 3i, a publicly listed UK private equity group, that left associates feeling disconnected from their immediate supervisors. “Our teams used to be organised by geography – so a 20-person team may be sitting in Glasgow evaluating all types of deals together. Under that management structure, associates had direct access to their supervising principals and partners. But later we reorganised across product lines, meaning the people who specialised in buyouts or growth investments, for instance, were spread across all our offices. After that matrix hierarchy was introduced, you could sense in the younger staff this feeling of distance from the partners who led their product lines. It’s hard to guide a young associate with conference calls or irregular office visits. It needs to be more face-to-face.”

The almighty dollar

One of the biggest motivators for people to stay with a firm is money, of course. But in private equity, the reward of performance-based carried interest can be years away. And at a time when GPs can no longer expect big carry payouts as a matter of course (as many did during the industry’s golden era in the mid-2000s), it makes it that much more difficult to retain ambitious talent eager to begin amassing some wealth. 

A related problem is that young private equity professionals are unlikely to have bank accounts big enough to invest into the funds they help manage – and this “skin in the game” is seen as a vital part of aligning fund managers’ interests with those of LPs.

Private equity firms have adopted a few strategies to deal with these issues. Some rely on discretionary bonus pools to keep junior staff motivated when prospects for carry seem low, or too distant in the future. Annual or biannual performance reviews can be used to give junior investment professionals appraisals of their development and determine their bonus payout.

Another tactic some firms use is simply to promise more carry. A growing number of private equity firms are using side pots of unallocated carried interest shares to reward junior outperformers, especially those who mature and take on more significant roles during the life of a fund. 

GPs typically save a portion of the firm’s carry profit share, known as “reserve carry” in industry parlance, to incentivise staff and allocate carried interest rights to new dealmakers who join after a fund has launched.
“A GP may allocate a significant percentage of the carried interest on the closing of a new fund, but retain a percentage to allocate to dealmakers who outperform throughout the lifecycle of the fund,” says John Gripton, a managing director and head of investment management at private equity fund of funds Capital Dynamics.

The use of reserve carry today is much more “formulaic”, adds Marco Masotti, co-chair of law firm Paul Weiss’ private funds group. “GPs are increasingly looking for ways to incentivise younger professionals to remain put, and are holding more conversations about how unallocated carry can be used to accomplish that.”

For junior dealmakers who aren’t rich enough to cover six- or seven-figure personal commitments to a new fund, firms are also looking at ways to bankroll them. According to Kirkland & Ellis private funds partner Andrew Wright, these include using proceeds from prior investment vehicles (or co-investments), utilising credit facilities, funding commitments with ‘waived’ management fees, or footing the bill themselves. “In certain cases, the senior partners may assume an outsized proportion of the sponsor’s total fund commitment.” 

Simon Hamilton, global head of fund finance at specialist lending provider Investec, says the other popular strategy is for the management firm to borrow from an outside credit provider. “Some senior GPs have money tied up in their previous funds and don’t have the cash flow to lend their junior counterparts money for the next fund,” says Hamilton. “We provide facilities to bridge the gap.”

Whatever strategy adopted, the end goal is clear: to incentivise top-performing junior staff to stick around. At a time when many firms are looking for ways to assuage investor concerns about their retention abilities and succession planning, it’s an area that’s likely to receive a lot more attention.