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When it comes to talent, PERE firms could learn from tech

Most managers would benefit from rethinking their compensation structures and corporate cultures – or else risk losing their best young employees.

Ask any private equity real estate executive what his or her primary concerns are, and the loss of talent would almost certainly be one of them.

Younger professionals are particularly a flight risk, given that compensation structures and work cultures at these firms often are at odds with the priorities of the newest generation in the workforce.

Take the case of deferred compensation plans. With closed-end vehicles, professionals at many fund managers can wait up to 10 years before receiving their share of profits, and given the cyclical nature of real estate, such profits are not a certainty, according to a new paper from tax and advisory services firm EY, Courting millennials: Re-evaluating Private Equity Pri Fixe Menu Models for Compensation and Culture. Career paths are also unclear at these firms, as opportunities for advancement can be few and far between.

Meanwhile, the work culture at many real estate managers is such that many employees are expected to always be reachable, even on weekends and holidays. Previous generations may have been accepting of these longstanding practices, but younger employees generally have been less receptive, especially when other sectors offer more attractive career options. Indeed, since the global financial crisis, more than 50 percent of the private equity real estate professionals who have left the industry have gone to tech, Mark Grinis, EY’s global real estate, hospitality and construction leader told PERE this week.

Tech has arguably done a better job of tapping into the goals and priorities of millennials, which include not only compensation and career opportunities but also ‘softer benefits.’ In its report, EY created a word cloud from broader employee incentives touted in the job postings of the top tech firms. While some of the largest words, such as “retention bonus,” “signing-on bonuses” and “large stock-based compensation” were pay related, others were not. “Problem-solving role,” “exceptional career experiences,” “easy interaction with top management,” and “quality of life” also were prominent.

It should be no surprise, then, that many private equity real estate executives have continued to face attrition challenges, particularly among junior employees. Attraction and retention strategies now require a greater level of attention from senior management than previously.

The good news is that some firms are starting to rethink both compensation and work culture. About two-thirds of the 15 private equity real estate managers surveyed in the EY report are in the early stages of re-evaluating their compensation and promotion policies, while half are considering more flexible work arrangements, according to Grinis. Many of the executives acknowledged they not only could implement such changes, but could likely do more to attract and retain millennial employees.

Meanwhile, Andrew Fein, a principal at executive search firm Heidrick & Struggles, said junior-level attrition was “a hot topic” among some of his clients. He noted that some firms are seeking to tackle the issue by promoting or give more responsibilities to younger employees more quickly than they would have in the past.

But how much will change on a broader industry level? Certainly, it will be easier for larger fund managers to develop and implement new policies than for midsized and smaller firms lacking the human resources infrastructure needed to revamp existing practices.

At the same time, if they do not act quickly enough, private equity real estate managers stand to lose some of their most promising young talent, and their competitive edge with it. Given the increasing cachet of tech for millennials, what may be this industry’s loss could be another’s gain.