Private Equity Isn't the Biggest Risk to Your Firm
By Fiona Ettles, Partner at FinConnect
There's been a lot of talk about private equity in the financial services industry lately. I was talking to a colleague at a conference recently, and we both agreed there's a lot of noise, but not as much actually happening. It's easy to sit back and say private equity is a risk to the profession, but it's more than that. The biggest risk isn't private equity itself. It's losing sight of what creates value in our businesses.
So what does create value?
Relationships. The push to improve profit margins quickly can crunch staff and overload team members with new revenue. That slows service, and slow service damages relationships.
Perceived independence. With audit still a factor in many large firms, there's more doubt over true independence, particularly in light of the PwC and KPMG scandals. The same can be said for financial planning and alignment with product providers.
Culture. Financial services used to be about long-term relationships, partner tenure and professional reputation. Private equity firms often introduce stronger growth targets, acquisition strategies, KPIs and governance measures, and amid all of that it's easy to lose sight of what sets us apart.
Client choice. As small and medium firms consolidate into larger "head" entities, choice shrinks for clients who prefer personalised service, more contact with a Partner or Lead Adviser, and more individuality. Maybe they were paying for that, maybe they weren't, but there will always be a place for boutique firms that provide genuine customer service.
People. Traditionally, junior staff would progress to Adviser and one day to Owner. With the shift to AI and automation, the pool of future employees is dwindling. How do we recruit at the senior level if we're not investing in careers along the way? We recently spoke to a firm reducing its graduate intake from ten to two, with more emphasis on getting "the right two": the ones who'll progress through to later career stages. That's a high-risk strategy when seven or eight in ten would typically leave along the way.
Succession. Private equity provides a pay cheque, but any equity holding still comes with the responsibility to replace yourself. With a shrinking pool of prospects, it's important to keep focusing on who will be next, and private equity can't solve that on its own. In a firm with more KPIs and governance measures, how do you keep building your firm's next Partner?
Does private equity solve the challenges of operating a business? No. Can it provide a partnership to work together? It can. If you're weighing it up, here are some questions worth asking.
The private equity firm will do due diligence on you, but will you do due diligence on who you're partnering with?
You know the people you're dealing with today, but what happens when they sell out, or when their staff turn over? Who will you be partnering with next, and will the cultural fit still be there?
Do you have the means to realise your value without private equity? For example through internal equity? And could taking on private equity limit your ability to reward and retain staff by offering equity internally?
Are you getting your best value by transacting one-on-one with private equity, or should you appoint an adviser to represent you? (Stay tuned, I've got a piece coming on this one.)
Does private equity actually solve your succession problem? Will it help you recruit and grow the adviser who'll take over from you, or does it just kick the can down the road?
The buzz around private equity is loud, but you should always consider whether it's right for you, now and into the future. If you'd like to talk through what it might mean for you and your business, book a call with Fiona here.
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