Welcome to the “Private Capital Talent Series” with PFA Solutions CEO Richard Change and Ryan Burger, VP of Product Strategy/Client Delivery.
Grab a coffee, and learn what can be done to enhance transparency, automate tedious manual processes, and improve efficiencies within your firm.
Chris Gale 00:03
Welcome everybody to the private capital talent series. My name is Chris Gale. Today we have the CEO of PFA Solutions, Richard Change, and we have Ryan Burger, VP of Product Strategy and Client Delivery. This is episode one of the Private Capital Talent series, the intersection of tech and talent. For our first episode, we’re going to ask Richard Ryan about what they’re seeing today in the private capital world, what’s happening with talent, tech, and with carried compensation and interest. We invite your feedback afterward. We’d love to hear questions and see if we can answer some, if not all of them, when we get to the end. If you have feedback, if there are folks that you’d like us to have on or things you’d like to hear us talk about, please let us know. We’d love to hear it.
I’m going to jump in right at the beginning. Everybody here who’s joining lives and breathes private capital. They know what their December, January, and February were like. But if we were to talk about what is happening with compensation strategy and talent – Richard, maybe kick us off. Talk about what the pressures are on private capital. Today, what are folks saying about compensation strategy and talent?
Richard Change 01:23
Pressure from the deal volume. Exceeding high deal volumes are putting additional pressure on being able to acquire and retain talent. We’re seeing that in the industry. We’re making sure the firms that we work with have mechanisms and tools to ensure that they’re able to communicate their compensation plans to employees, making sure there’s transparency. Firms are under pressure to turn those reports around on a more timely basis. The pressure comes from the overall volume and velocity of new deals.
Chris Gale 02:30
I’ve seen due diligence go from six months to four months, and there are the new SEC regs that are out there. If we talk more about the talent part of that, folks being stretched, what can you tell us?
Ryan Burger 02:54
Yes, the talent is being stretched. EY recently put out their annual industry state of the industry survey for private markets and firms of the gamut of sizes. The number one priority for 81 percent of firms between $2.5 billion and $15 billion was talent management. Sixty-eight percent of those firms over $15 billion said that talent management was their top priority. Across the board, we’re seeing folks focus on hiring and retaining their best people. From our perspective, it seems like there’s not enough top talent to go around. In addition to the fund managers, we’re seeing talent issues with the fund admins, consulting firms, and software companies like ourselves all trying to keep and hire the best folks in the industry. The industry grows. The mega funds are growing exponentially. Midsize firms are growing. Every day we’re learning about smaller companies that we never heard about that have aggressive growth plans over the next few years. They’re all trying to get the best people and keep their best people.
There’s also the Great Resignation happening. Some of our clients are seeing issues there. Some of them are fine. We’re seeing a mix across the board. But overall, people are looking for a better work-life balance: better compensation, better flexibility. Some people want to change the type of jobs that they’re doing. There’s for sure a lot going on when you think about tech. This series is labeled the “intersection of tech and talent.” We are a people business. But another thing that we are seeing is firms making the best use of technology across investor relations, investments, finance and accounting, cybersecurity, and big data. Every firm is interested in upping their game from a technology perspective. It’s exciting for us as a software company in this space to certainly grow with the overall industry.
Chris Gale 05:16
Let’s drill down. We’ve set the stage: the pressure that folks are under, the stretch to find high-quality talent. How is technology used now with compensation strategy and carried interest specifically in private capital? Richard, can you talk to us about where is the intersection point with PFA, the solutions that we’re being asked about, and the problems that are being brought to us?
Richard Change 05:50
Think about compensation holistically. Carry is a big component of it. Carry plans are not just the partners and founders or the firms. A lot makes its way down to non-partners. The management of that information, particularly, has been not online. It’s been offline. Being able to systematize that information, make it part of the overall compensation package, and show that information in a timely fashion is a challenge.
From a technology standpoint, having a solution that not only shows your base bonus, but your carry and co-investment information and your partial stake in the management company, gives you the holistic picture that companies are looking for now. It’s just the fact that this information exists in silos. From an employee’s perspective, what they don’t know, they don’t know – meaning they can’t see that their overall compensation picture is much rosier than they imagined because they didn’t have a chance to see that information. That’s where the burden falls back on the manager not being able to provide that information to the employee in a timely manner, right? We’re seeing a lot of firms work to provide a more holistic picture of compensation back to their employees.
Chris Gale 07:23
How are private capital, VC, and PE firms handling carry today, especially if they’re either raising an additional fund, adding to the funds they already have, or absorbing acquisitions? Can you walk us through what that looks like? Why it might be challenging to bridge the gaps?
Richard Change 08:08
It’s Microsoft Excel that we’re competing against. A majority of firms will have grown up leveraging several different worksheets and formats and formulas all nested and stored in Excel. What they’ve realized is, once you’re on that second or third fund, Excel doesn’t scale. Over time, you have challenges and changes, joiners and leavers to and from the firm. What does that do? From going back and rebalancing your allocations across the various funds or, if you’re doing deal-by-deal carry, it gets very complicated very fast. Our application helps us really to systematize that process. We’re not going to take Excel away from someone as an analytical tool – not from their cold, dead hands. It’s going to always be there from an analytical standpoint. But it shouldn’t be a data storage mechanism. First and foremost, we try to get people off Excel and have their data stored in a system so they can extract and perform any further analytics that they want. Our system works to allow companies to do just that. It becomes an issue of not being able to manage the complexities of changing carry plans over time as people are joining and leaving firms.
Chris Gale 09:47
Excel has tons of staying power. I think we’ve all heard, “I like your software. But can I download something? So if I need to an escape hatch?” Or is it that we are looking for automation, to be less manual maybe than with Excel? What are the benefits? What are the concrete benefits that I can take to the leadership at my firm, for instance, and say, “There’s going to be some folks grumbling about moving off of Excel, but this is the reason why we’re doing this. This is what is going to be better.”
Richard Change 10:40
Two points. One is reporting in a more timely manner. That’s the first benefit that people take back to management. Right now, to answer one question for a particular partner in a firm, let’s say it takes someone a few hours to put together the analysis in Excel and push that information back. Being able to provide that reporting more efficiently is the first benefit. The solution can provide essentially push-button reporting for an employee’s compensation and carry across funds and investments.
At some firms, the burden that reporting puts on the GP accountants, who are essentially the ones responsible for providing this information, wears them out over time if they’re still managing this in Excel. Ad hoc queries come maybe late at night. Now they have to spend hours putting together and correlating multiple Excel spreadsheets to provide the answers back. This goes back to the retention challenge that we see. If you’re burning people out because it’s all manual, then you have a problem. People are looking to ease the burden on the employees responsible for this. We see that, over time, you can’t continue to solve this issue of managing carry by adding more bodies. You just run out of bodies and run out of people who understand what is being done.
Chris Gale 12:17
Is there a reason to bite the bullet and do it now? What about the compensation cycle? What’s the reason to engage with us now?
Richard Change 13:16
Retention and recruitment of talent. There are new fundraises all the time. I can’t quote the amount of dry powder that’s sitting in the industry right now. But there’s high competition to attract and retain talent. So I think there’s pressure there at the macro level. Early in the year, companies are starting to think about summer associates that may be coming into the firm, getting compensation plans and carry plans in place to facilitate the process there. We help them start the process from a planning standpoint.
Chris Gale 14:20
Are there benefits of having a solution in place and tested in time for summer? Does that help you set up for the end of the year?
Richard Change 14:36
It does help you set up for the end of the year. Putting these systems in place in the summer only helps you facilitate the year-end process and gain a better picture of compensation across the firm. That also gives you a better guidepost to acquiring and onboarding new people going into it from a compensation standpoint. If I have a new employee coming on, and I’m looking at their base or bonus from the carry, and we’re negotiating whatever terms, I have a better understanding, a picture of where they fit, particularly with this team. Are we paying them too much? Or paying too low? If I throw in market rates as well as outside views into the markets, we holistically view compensation depending on where that person sits within the firm. We can tie in different elements, like diversity and inclusion, as well. Now you have a better data set, right? You can now not only use a system to facilitate your end, but you can also have those internal decisions and discussions about fairly compensating employees across the board. We’ve seen our system start to provide that analysis as well. Given the times, people are definitely more interested in this level of understanding.
Chris Gale 16:09
Ryan, I know that you had a white paper come out recently, available on the PFA site and via LinkedIn, that touches on the question of transparency. You listed four things to watch out for with compensation strategy and automation. Can you tell us more about that?
Ryan Burger 16:42
Sure. The article title is The Digitization of PE and VC Compensation. It touches on four main areas that go back to the dialogue that we’ve been having for the last 20 minutes or so. They were observations that we had. The first one is better employee reporting and more comprehensive reporting to employees. The second is self-service portals where employees can log in to access documents and data at their fingertips. The third component is management analytics, as Richard mentioned. That’s a top priority. Ultimately, the fourth is using software applications to facilitate the first three items.
To go into a little bit more detail on each one, for the employee statement, on the production side, we’re seeing firms include carried interest awards, the statements where they show what’s vested, what’s not vested, and what’s accrued to date. and putting in projections, as Richard mentioned, where employees can see how rosy that extra looks long-term if they’re going to make changes based on financial reasons. They have much, much more clarity and transparency on how things look for their personal compensation data. These statements also include personal capital contributions and commitments that employees make within the GP entity or outside the GP entity where they’re investing alongside limited partners. We’re seeing that full aggregation picture in these statements. Some firms also include salary details, bonuses, medical reimbursements, and retirement plans. I even see lunch allowances as a line item in these reports.
The industry is moving to that better, more digitized experience with lots of information for employees to access. This also reduces the strain on the CFO and finance department where they’re getting all of these inquiries. So now people can access info so they don’t have to have these uncomfortable conversations, always asking how much their carry is worth, etcetera. Just yesterday we were talking to a client that wants to do monthly reporting, where they do accruals of carry, and then send out these statements to all employees. The portal aspect of our solution is obviously valuable. We’re all on our phones, all on our computers, and tablets, more than we’ve ever been before. The technology’s there. So our clients and potential clients all want to use these portals so that employees can quickly access their information at their fingertips. Then, just to piggyback on Richard’s point on the management analytics, firms want to see that collective universe as they raise new funds, how much could they allocate to these new employees that they need to hire, it is also being used from a forfeiture perspective? As people leave and forfeit carry, is it going back into a house account? It’s getting reallocated back to certain partners? If they have that full picture, it helps them tremendously to generate a system. It doesn’t put that strain on the finance and HR departments that are spending days or weeks trying to cobble all this information together. Lastly, you really can’t do this in Excel. You can’t produce these types of statements, these types of reporting, and the portals, through spreadsheets anymore.
Chris Gale 20:26
It’s to the point is not necessary. The point is that it’s as comforting as Excel may feel. If we do the work, that process should be easier and more scalable. Then I can more readily have transparency, with employees, and with management. It makes the data much easier to work with.
Ryan Burger 21:04
Not only do you get that transparency and management that can produce better reporting. We’re also seeing companies wanting to institutionalize their operations. So employees can use these statements to go get a mortgage, professional-looking statements. We sometimes joke, “Oh, no, we just write it on a napkin.” But private capital firms are now operating more like bigger companies. The industry is growing tremendously. They all want to move online and be able to provide professional-looking reports to employees.
Chris Gale 21:47
It almost gives a score sheet to a certain extent to the employee, in terms of being able to readily see how their performance and the firm’s success are aligned. It’s really cool. But I wanted to rewind a bit. Richard, can you share PFA’s origin story? I think it might provide some context.
Richard Change 22:46
We started back in 2013. It was really the challenges I saw at my previous employer. A team of fund accountants, we’d really go through a distribution process with the printout of Excel, multiple pages, and a ruler.
They would take and tie every single allocation to ensure that those allocations were correct, line by line. It was always a late night. We always figured there had to be a better way. One of those a-ha moments for me was when I realized that, if we can go ahead and systematize this process, and make it so that no one’s spending long hours validating information that can be done quickly, in a snap, systematically, then let’s put that in place. Let’s try to help and streamline that process. That was really one of the things that got us going on the solution side – to provide a better way to manage carried interest plans.
Chris Gale 24:20
Whoever was printing out the Excel and using the ruler – have you been able to go back and find that person or folks like that and show them how things can be done now?
Richard Change 24:32
They did realize that they weren’t alone. Their peers were doing the same thing. That really was the commercialization of the project. Looking across at peers and seeing that they’re still managing carry on Excel spreadsheets. Everyone seems to have the same problem. We can streamline and systematize this process.
Ryan Burger 25:14
I was going to add to Richard’s example. A client had a problem. It wasn’t Excel based exactly. It was more about trust in the data and the whole institutionalization of reporting. They would have an HR person go into a conference room and show a piece of paper with what they thought were the right compensation elements and carried interest. And then they would pull that piece of paper back at the end of the meeting. And then they decided to make major changes. They are now users of our portal where all of their employees log in, get all their statements, get all their K-1s, and their legal agreements, there’s an acknowledgment button. They’ve gone full circle from not trusting the information that they were putting on a piece of paper and pulling back to actually disseminating this online via a user portal.
Chris Gale 26:21
That is fantastic. I’ve got two questions. Question one is, what’s the best way to see this? It sounds like a lot of this is in the visual presentation. What’s the best way to see what automation should look like?
Ryan Burger 26:44
Reach out to us for a demonstration.
Richard Change 26:53
We’re more than happy to sit down and walk through what the product does. What are the client’s pain points? We’ve done this for a number of clients. No two are exactly the same. There’s always some nuance to it.
Chris Gale 27:28
Perfect. Are there questions that firms should be asking themselves to decide if the time is right? For instance, things may be just fine with Excel at a certain scale. Are there triggers or metrics where you’ve seen folks have outgrown Excel and opted for this solution?
Ryan Burger 27:59
We’ve seen tipping points. Sometimes it’s raising that third or fourth fund. Sometimes it’s brand new launches where they want to put in some sort of system right from the start. They don’t want that cumbersome Excel model. We’re seeing very large firms with five, 10, or 15 carry plans that they can’t operate in Excel any longer. The tipping point is really when firms want to do something innovative, have better reporting, use a software platform or service provider, or build something in-house. It’s really just that that innovative mindset is what we see as that trigger. It usually has to do with a tipping point of multiple funds and entities and complexities and leavers, joiners, and different vesting schedules are what pushes them over the edge.
Chris Gale 28:55
What is the implementation time? Or what’s the range of time it takes to implement?
Richard Change 29:07
It varies by the size of the firm and the complexities of the carry plans. We’ve seen implementations go as soon as two to three weeks to 10 to 12 weeks. It really just depends. What elements do they want to bring from a data standpoint? They may manage and carry. As far as compensation, do they want to see all that information together? It varies. I think what we put together is a playbook. We’re able to sit down, understand how they’re operating, and put together a roadmap and a plan to get them fully on board.
Chris Gale 29:46
Well, thank you both very much. Thank you to everybody who joined. To see a demo, please reach out to the team and stay tuned for the next episode.