Private equity's talent challenge: Keeping it out of the family

[January 06, 2020]  By Chibuike Oguh

(Reuters) - Family offices, which handle the wealth of the very rich and their kin, are increasingly poaching young talent from buyout firms, challenging the private equity industry's claim as the destination of choice for aspiring dealmakers.

The five executive headhunting firms with the biggest market share on Wall Street - Korn Ferry, Egon Zehnder, Russell Reynolds Associates, Odgers Berndtson and Heidrick & Struggles - told Reuters they have seen a significant increase in the number of private equity professionals moving to family offices in the last five years.

Walton Enterprises LLC, Pritzker Private Capital and Soros Fund Management LLC are among the family offices competing with private equity giants such as Blackstone Group Inc <BX.N> and KKR & Co Inc <KKR.N> in the fight for talent, the headhunters say.

A spokeswoman for Pritzker Private Capital confirmed it seeks to hire top talent from private equity firms. Walton Enterprises, Soros Fund Management, Blackstone and KKR declined to comment.

Some money managers making the move to family offices say they are lured by the lucrative pay that is often offered and are seeking to escape the private equity industry's intense pace of sourcing transactions and fundraising.

"I wanted to do something more entrepreneurial. I had two very young children and I saw that the lifestyle of a private equity partner would not allow me to be as present in their lives as I wanted to be," said Sarah Overbay, who manages the investment portfolio of North Island, the family office of Glenn Hutchins, a co-founder of Silver Lake Partners.

Overbay previously spent six years working at private equity firm Freeman Spogli & Co before joining Marron Capital, the family office of late financier Donald B. Marron, in 2011. "Don offered me similar compensation to what I was making," she said.

Many family offices are investors in private equity funds. The competition for talent underscores family offices' growing ability to bypass buyout fund managers and allocate money directly to leveraged buyouts, avoiding the private equity industry's hefty fees.

Family offices have been poaching private equity talent by tweaking their compensation plans. Just like private equity firms, they are offer investment professionals substantial "carry economics" - the performance fees tied to investment returns - in addition to salaries and bonuses.

 Billionaire investor George Soros and his wife Tamiko Bolton attend the Schumpeter Award in Vienna, Austria June 21, 2019. REUTERS/Lisi Niesner

The competition has been intensifying as the family office industry grew in assets under management from about $4 trillion in 2017 to $5.9 trillion this year, according to market research firm Campden Research.

"The growth (in family office recruitment) is two-fold: there's more wealthy families who can create investment firms, and a dissatisfaction with private equity firms," said Joe Healy, a partner and head of the private equity practice at Korn Ferry.

BUYOUT FIRMS SWEETEN TERMS

To be sure, the private equity industry continues to attract the bulk of aspiring dealmakers, given the relatively small size of family offices' investing teams, executive headhunters say. It also remains an attractive destination for many investment bankers and seasoned corporate executives.

But even in instances where staff is not poached from buyout firms, the intensified competition for talent had raised the pressure on them to provide attractive employment terms and a desirable work-life balance, the headhunters said.

Base salaries and vacation time in the private equity industry have been rising, while staff bonuses and long-term incentives accounted for a greater percentage of overall compensation in 2019 than in prior years, according to the 2019 Private Equity & Venture Capital Compensation Report.

"Family offices understand that the cost of acquisition for this type of professional is high, but the return can be easily measured, and they may be more inclined to provide that type of incentive," said David Fox, president of Northern Trust's global family and private investment group, which oversees up to $92 billion in assets for single-family offices.

(Reporting by Chibuike Oguh in New York; Editing by Greg Roumeliotis and Dan Grebler)

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