Private equity talent management in emerging markets
September 2013 | SPECIAL REPORT: PRIVATE EQUITY
Financier Worldwide Magazine
In the competitive profession of private equity, what keeps managing partners up at night? For many prominent emerging market fund managers, some of whom seemingly face few binding resource constraints, the answer is often something unexpected: an empty desk. According to the Emerging Markets Private Equity Association’s inaugural Private Equity Talent Management in Emerging Markets Survey, competition for qualified talent, which is expected to intensify in most emerging markets over the next five years, is a key challenge for the private equity industry.
When global fund managers set about building new country teams, finding the right person to head the office can sometimes take years. Even when there are sufficient numbers of qualified candidates seeking private equity positions, that desk may be too expensive to fill, and even then, may not stay occupied for very long. In discussions with private equity practitioners, we have found that talent management remains one of the key pain points for private equity fund managers in emerging markets, where the pools of experienced human capital aren’t as deep as those in developed markets. Moreover, given that private equity is patient capital, the learning curve for industry professionals can be longer than that of their peers in other industries. As a result, a proven track record in the asset class can be an especially rare and sought-after qualification.
To shed light on these dynamics and more, this spring, EMPEA surveyed 88 private equity practitioners active in the emerging markets regarding their firms’ talent management practices. The study identified three broad themes: (i) competition for talent at the GP level in emerging markets is set to intensify in the short term, notwithstanding the recent dip in emerging market private equity fundraising and investment; (ii) the talent pool is thinnest for mid- and senior-level positions that call for operational expertise (as opposed to more junior positions requiring mostly finance and analytical skills); and (iii) not all emerging markets are alike, with some relatively faster-growing private equity markets (such as Sub-Saharan Africa, Emerging Asia and Latin America) outpacing the BRIC economies in terms of unmet demand for talent.
The broad trend is unmistakable: practitioners expect competition for qualified talent over the next five years to intensify across the emerging markets as a whole. The development is especially pronounced in Sub-Saharan Africa and Emerging Asia, where 75 percent of respondents active in those regions predict more intense competition. (This parallels, incidentally, results from EMPEA’s 2013 Global Limited Partner Survey, which uncovered a new grouping of emerging markets deemed most attractive for GP investment, led by Sub-Saharan Africa.) Though less stark, the consensus in most other emerging market regions is also for scarcer qualified talent over the short term. In other words, despite the alarm bells being rung over the fate of the emerging markets of late, the decision-makers closest to the ground expect demand for effective private equity practitioners to continue to outpace supply.
Second, there is a sharp distinction between the demand for financial analysis skills – which is largely satisfied by a steady flow of investment bankers or newly minted MBAs eager to enter the industry – and the ability to add value through operational expertise. Respondents in virtually all emerging markets regard the latter as the real bottleneck in hiring. In the words of one industry professional, “In these markets, financial acumen and wizardry are not as renowned as an ability to grind through the 100-day business plan.”
Why are skilled operators such a rare breed in emerging markets private equity? Our study suggests it is because private equity investment into emerging market businesses requires a unique confluence of hard skills, sector expertise, attitude and local knowledge that is still uncommon in many markets. In these regions, finding someone who can check all of the boxes can be an Augean task. As operational value-add and performance attribution continue to grow in importance amongst LPs, this could put operational expertise at an even greater premium.
Finally, despite a clear trend toward tighter labour markets across all of the regions surveyed, the emerging markets are not monolithic; while some markets are set for significant shortfalls in qualified candidates, others are predicted to see only a modest increase in competition for talent. For example, only about 30 percent of surveyed professionals active in Russia, the Commonwealth of Independent States and Central & Eastern Europe predict competition for talent to intensify in these markets. The survey also shows a similar cross-regional pattern for expected increases to payroll expenses as a percentage of total operating costs.
But so what? Every industry faces a labour pool that obeys market dynamics. Do these trends in hiring have any relevance on the future of the emerging markets private equity asset class? We believe they do.
First, information about the future path of talent management may hold insights into the behaviour of individual fund managers as well as of investors into these vehicles. In some cases, the prospect of how readily (and economically) a GP can staff a new country team may tip the balance in favour of – or against – the decision to enter a market. Conversely, the knowledge that a particular region has seen persistently high GP staff turnover could prompt LPs to examine the team composition of that region’s GPs more closely before making a commitment.
Second, the absence of a more extensive talent pool in regions with less-developed private equity markets could act as a brake on private equity penetration and augur poorly for the development of the industry as a whole. If the talent pool does not keep pace with demand for qualified hires in these markets, it could limit the prospects of new entrants either by saddling them with high payroll obligations or by leading them to resort to less qualified hires – or perhaps both.
Some of the ingredients for profitable and impactful private equity in emerging markets rightly receive considerable attention today from fund managers and limited partners: entry valuations, institutional protections for investors, local economic conditions, the exit environment, etc. However, the industry must also find ways to address its apparent operational expertise deficit to advance the growth of the asset class. As EMPEA’s Impact Case Study Series highlights, this expertise not only is indispensable for creating value and driving private sector development, but also has the potential to deliver tangible benefits to local communities across the emerging markets.
Haitham Jendoubi is a research fellow and Michael Casey is a director at EMPEA. Mr Jendoubi can be contacted on +1 (202) 333 8171 or by email: firstname.lastname@example.org. Mr Casey can be contacted on +1 (202) 524 6107 or by email: email@example.com.
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