Private equity firms traditionally identify and invest in established companies they believe are failing to reach their full potential, or that simply have scope for significant future growth. This will usually involve ‘buying them out’ and gaining control. Yet the advent of growth capital opportunities has started to influence a completely different approach – one that involves getting in on the ground floor, usually as a minority investor, hoping to achieve far greater potential returns.
This growing trend of investing in younger, less established startups is bringing PE firms into direct competition with the venture capitalists who typically target investments of this type. So, the rise of the late stage growth capital investment is starting to blur even further the already hazy lines between PE and VC. And it may even have a significant impact on the way private equity approaches hiring.
As PE teams intensify the search for the next Facebook, Uber or Amazon, they will in turn increase the demand for experienced investment professionals from the high growth and tech enabled communities. So the competition with VCs won’t simply be limited to high-growth investment opportunities. It may well also extend to the people with the backgrounds, skills and know-how to find and close them.
As we’ve already mentioned in our diversity blog, there’s already a war for talent amongst investment firms. If PE continues to move into the later-stage VC space, that shortage will only deepen. So where will private equity firms find the right people to head up and run these so called ‘growth capital’ investment teams in the brave new world of the unicorn? The most obvious place to start is, of course, the VC pool.
After all, PE firms typically hire from a small number of rigid backgrounds such as M&A. This approach sits in complete contrast to VC firms that generally take a far more flexible stance, seeking employees who offer commercial experience rather than numerical expertise.
Will PEs now start to recalibrate their hiring strategy towards more experienced and established experts in the field? In ten years, they may well be on the lookout for candidates with drastically different skill sets than is the case right now. If so, we are heading towards a scenario that puts them in direct competition with VCs for a finite supply of talent – a situation that has never really happened before.
This isn’t a short-term problem just yet, but it is one worth thinking about for the future. How often have we seen businesses unwilling to adapt to change being left behind? At the same time, who can say with any real assurance just how much of an impact the search for that next star deal will have on PE firms in the future? Time will tell.
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