Modern private equity and venture capitalist firms have been around for over half a century. With time, these firms have gotten better and more efficient at what they do by leveraging technology and expertise. This is why, nowadays, you won’t get to read any news about major PE or VC firms blowing up and ending up bankrupt. Advanced tech like machine learning, artificial intelligence, neural networks, etc., allows them to process and analyze data with extremely high accuracy, enabling them to make highly accurate decisions which helps them make massive strides that eventually result in fast and sustainable growth over a long period. Having said that, it is often noticed that this level of positive and aggressive change is not exactly translated over properly to other internal departments within these companies. In this article, we will be going through the important details of how PE and VC firms can leverage HR to find areas of untapped potential that can be accessed to find more growth.
Definitions and Distinction
The term ‘private equity’ is commonly used in a broad and all-inclusive sense by both proponents of the industry and its critics. Simply put, these are two fundamentally different forms of investment.
First, the early-stage investments in new endeavors that often operate in emerging or fast-changing sectors are commonly termed ‘venture capital’ or ‘VC’. There is a broad consensus that venture capital’s effects are generally positive, other than, in some instances, contributing to excessive speculative bidding up of share prices.
Second, and what is often referred to as ‘private equity’ per se, is the buying out of mature enterprises by large investment groups on the basis that a change in governance and management style (or an ability of the present management to operate more effectively) will lead to greater returns. The second category, in and of itself, is diverse. There are buyouts by outsiders, including leveraged buyouts (LBOs), management buy-ins (MBIs), and investor-led buyouts (IBOs).
Another different category of business called ‘hedge funds’ is also commonly clubbed in with the definition of ‘private equity,’ which is anything but accurate. In the most basic sense, ‘hedge funds’ are organizations that take large sums of money from the super-rich, a.k.a HNIs (High Networth Individuals), and give them to professional money managers, who invest those sums of money in the various types of global money markets to derive better-than-average returns. So, not exactly ‘private equity.
HR Challenges in PE and VC Firms
Lack of Internal Flexibility: Most VC and PE firms do not have a typical organizational structure like most other companies do. This is why the standard, template, HR activities and methodologies do not work very well.
For example, compensation for a typical associate in a VC firm could look very different from associates in other companies who operate in other industries. Part of the compensation could be an offer for stakes in a client company and variable pay could consist of various different variables that do not fit in the ‘conventional HR’ spectrum. Another example is expense tracking. Complex expense tracking might require fairly high degrees of customizations to be made for the tracking to happen successfully.
Lack of Talent Professionals: Most VC firms receive around 50-60 inbound profiles daily, including those of senior professionals and industry experts. Most of the time, they might not have the right opportunities for these profiles within their organization. But on the other hand, ignoring such gems would be a colossal waste of brand value if not used to match with portfolio companies.
For example, a VC firm might have a portfolio of 110 companies that operate in different industries. The VC could then get an excellent profile for the role of a data scientist at a time when they are not actively hiring for that position. In such cases, the VC could sift through their portfolio of companies to identify which company is actively hiring for the data scientist role. Once identified, the VC could then forward the profile to those companies from their portfolio. This matchmaking often requires extra teams of expert talent professionals who are fully qualified to coordinate and communicate with all stakeholders involved.
Lack of Effective Control on HR Departments of Portfolio Companies: While it may seem that VC and PE firms know what they are doing with their own HR department, more often than not, they have very little to no insight or control over the HR departments of their portfolio companies. This is a commonly known area of improvement in this industry. Think about it, every business on the planet is run by people at different levels in the organization. If there are no people or poorly managed people, there is no possibility of the business thriving in the long run. An HR department is, therefore, the most important part of any business, irrespective of location or industry.
Solution to these Problems
There are three different solutions to solving the HR problem in venture capital and private equity firms.
First, set up and manage a full-size HR team within the organization. The best part about going this route is that you have complete control over what happens in the HR department. Every micro-decision can be carefully thought through and reviewed before arriving at a conclusion. But on the contrary, the absolute worst part about this is the extremely high cost of setting up and maintaining a full-size HR team on your payroll.
Second, find software applications that fit your needs and solve all your HR problems. The best part of going this route is having instant access to important information in order to make important decisions. Most HR-related software applications provide solid insights based on the data that is fed regularly into the system. But on the other hand, the cost is still a huge factor in this option. Additionally, you still have to set up and maintain a sizable HR team to operate this enterprise-grade software. This adds to the cost.
Third, outsource the problematic areas of your HR. For example, you come to the conclusion that your internal HR team can handle recruitment activities without any problem, but when it comes to payroll management, they don’t seem to cross that invisible line into ‘good-enough’ territory. In such cases, you might choose to outsource the payroll activities of your business while still reserving the hiring activities for yourself to manage.
The best part of going this route is that you have clearly identified what works and what doesn’t in your HR department. What doesn’t work is handled by experts outside your company, while what works is handled by experts inside your company - a no-brainer, win-win situation. The worst part about this arrangement is that you might lose some control over day-to-day decision-making.
An extra, fourth option also exists that is more effective than all the previous three options combined.
Outsource all of your HR activities. Everything, from recruitment and payroll to compensation and training, is handled by experts outside your company. This is the most cost-effective and practical solution that new and upcoming VC and PE firms use most of the time. Even more important and valuable than cost-savings is the absence of people management headaches that take up management’s resources and time.
Sources: google.com | en.wikipedia.org | reddit.com | twitter.com | quora.com | freshworks.com | linkedin.com | journals.sagepub.com | statista.com
DISCLAIMER: The information on this site is for general information purposes only and is not intended to serve as legal advice. Laws governing the subject matter may change quickly and Exela cannot guarantee that all the information on this site is current or correct. Should you have specific legal questions about any of the information on this site, you should consult with a licensed attorney in your area.