Private equity real estate firms are facing an emerging threat on the human capital front: increasing competition from the tech industry for young talent, according to tax and advisory services firm EY.
“They fully acknowledge there is a percentage that they’re losing to tech,” said Mark Grinis, global real estate, hospitality and construction leader at EY, which interviewed approximately 15 private equity real estate fund managers in a new report, “Courting millennials: Re-evaluating private equity prix fixe menu models for compensation and culture,” to be released Wednesday. “There’s no shortage of people who said, ‘we are losing talent to the tech industry.’”
He added: “Tech continues to capture an increasing share of today’s college graduates. Since the financial crisis, almost half of the jobs lost from real estate private equity went to tech.”
“Since the financial crisis, almost half of the jobs lost from real estate private equity went to tech.” -Mark Grinis
“For decades, the allure and prestige of real estate private equity has placed it at the top of the food chain for many finance and business majors coming out of the best graduate schools,” the report said. “But an adjacent sector, tech, has firmly established itself as a vocation with equal upside, and a cachet that seems to align itself with the work style and aspirations of a new generation.”
Indeed, the number of Wharton School graduates opting to enter the financial services industry has declined steadily from 44 percent in 2005 to 37 percent in 2015 to 33 percent in 2017. By contrast, the tech sector’s recruitment of the school’s MBAs has been gradually rising, from 6 percent in 2005 to 11 percent in 2015 to 16 percent in 2017.
One challenge is that the deferred compensation structure in private equity real estate has not evolved to better attract young talent. “Closed end funds, with contractual lives of 8-10 years, often require a great deal of patience for the big payoff. And patience is not often called out as a leading attribute of millennials,” the report said. Moreover, most employees are not even included in deferred compensation plans at many firms.
To better attract and retain young talent, managers need to consider alternatives to the deferred compensation model and introduce incentive programs with more frequent payouts to employees, EY noted.
But compensation is not the only issue that private equity real estate firms will need to address, especially at a time when employees with technology skills – who would help real estate firms to make better capital allocation decisions – are increasingly in demand across many sectors.
“Softer benefits, clearer career paths and the opportunity for everyone to share in the success of the wider organization will become increasingly important,” the report said.
Private equity real estate “is one of the most demanding environments, where it truly remains a 24/7 type culture,” said Grinis, who recalled one respondent who characterized his firm’s culture as: “if your phone isn’t on Saturday or Sunday, we have a problem.” But such a corporate culture can be incompatible with the attitudes of many young professionals, who seek a better work-life balance.
“There’s still an expectation gap between that truly 24/7 culture and the need for millennials to have personal time,” he added.
In response to these challenges, about two-thirds of the firms surveyed are in the early stages of reevaluating their compensation and promotion structures, while half are starting to consider more flexible work arrangements, according to Grinis.
“There is an awareness on the PE side,” he said. “Most of the respondents said, ‘we could probably do more than what we’re currently doing.’ Most can do much more.”