Private equity funds have been evolving to meet the industry’s changing landscape. With greater investor demands, stricter regulatory scrutiny, and stronger market competition, it has become more important than ever for firms to strategize and spend to construct the ideal workforce. One major roadblock is the shortage of private equity talent.

In order to build a private equity team for operational excellence and maximum productivity, CFOs and fund managers are making it a top priority to attract and develop existing private equity talent. One of the major challenges CFOs and fund managers face is employee retention. This stems from a number of factors.

First, there is a shortage of talent. The scarcity of talent has intensified as the demand for new capabilities has grown. It is no longer a question of whether or not to use third-party service providers to bridge shortcomings but rather which functions private equity funds choose to outsource.

Second, there are significant costs associated with training and developing talent. Because firms allocate a large proportion of resources and time to groom talent for productivity, combating attrition reduces both monetary costs and missed opportunity costs.

Third, the new millennial mindset extends beyond market compensation and into additional needs such as new challenges and responsibilities. Deciphering benefits that resonate with millennials has become the focus of employee retention initiatives.

Meeting these private equity talent challenges come at a substantial cost and can form cogs in productivity if not preemptively addressed. In order to optimize personnel for operational excellence, CFOs and fund managers are ensuring enough resources are spent on personnel dedicated to core competencies, while turning to increasingly sophisticated third-party service providers for middle and back-office functions.

“I think that outsourcing certain functions is necessary because there’s no way we can attract all the different skill sets that we would need to support our business,” says one CFO in the $2.5 billion – $5 billion fund range.

Outsourcing increases capacity and reduces headcount. Additionally, certain costs can be subsidized by investors.

At the same time, CFOs understand and are keenly aware of the downside to outsourcing certain functions. These constraints include substandard service level and quality, the inability to manage complexity, and concerns over redundancy.

“I think the challenge with outsourcing is obvious; service employees aren’t naturally going to be as good as your own employees,” says another CFO in the $2.5 billion – $5 billion fund range.

In selecting a third-party outsourcing provider, CFOs should carefully contemplate the provider’s service capacity, the importance of the function being outsourced, and the provider’s technology offerings and industry expertise.

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