Do Private Equity Firms Prefer In-House Talent?

By Mike Gaffney

24 of 26 private equity firms surveyed regularly use external talent as part of their investment process.

The prevailing wisdom is that private equity firms are biased against using external operating talent as opposed to dedicated in-house talent, but are they? That was the question Bancroft addressed in a 2019 online survey of 26 private equity firms. The results were published in the white paper: “Use of Executive Talent Among Middle Market Private Equity Firms.”

In the world of private equity, people often assume firms have a bias against using external talent when doing the kind of research and analysis necessary for a successful deal. The prevailing wisdom is that most companies prefer to use in-house talent, particularly in the early stages of a transaction.

The survey was conducted in the fourth quarter of 2019, using online responses. Most of the firms (73.1%) focused on multiple sectors, while nearly 27% focused on a single sector. Of the companies surveyed, 52% reported that the size of their last fund raised was $500 million to $1 billion; 20% reported that it was $1.01 billion to $1.75 billion; and 28% reported $1.76 billion to $2.5 billion.

The survey asked a series of questions to elicit information about how much the firm currently used external talent: “never,” “rarely,” “frequently,” or “most/all the time.” It also inquired how likely firms were to use these resources at different stages in the investment process:

• Evaluating investment thesis
• Due diligence
• Post investment value add
• Frequency of executive talent use

The survey then gave respondents hypothetical scenarios in which they had unlimited resources and asked how that would affect their use of external talent. In particular, it examined at what stages in the investment process they were likely to increase their use of such resources.

The results of the middle-market private equity firm survey were quite interesting and challenged many long-held assumptions. It did not demonstrate that these firms exhibit a strong bias toward the use of in-house resources compared to external resources. Rather, it illustrates some of the challenges facing the companies in this sector. Demonstrably there is a gap between the reality of what these firms can do and what they would prefer to do. In particular, they would make more frequent use of executive talent if they could.

For a copy of the white paper and a detailed view of the results, click here.