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In the short term, most firms adapted successfully to a remote working environment. The long-term impact on the PE industry as well as its portfolio companies, of course, is still unfolding. In this new environment, the private equity CFO and finance team have an opportunity to act as agents of change and take advantage of the opportunities the pandemic has presented and influence the future of work in their organization.

The COVID-19 pandemic accelerated the digital transformation of private equity firms by forcing them to operate in a remote environment. Firms that had yet to challenge the flexibility of their workforce had no choice. CFOs, for most firms, noted that the transition was fairly seamless as they were already moving to create more flexible remote work arrangements. This enabled them to quickly adapt their work setting, including office size, layouts to accommodate social distancing and office locations. Forward-looking firms recognized this as an opportunity to improve and redefine their operating model. At the same time, firms also had to quickly shift to virtual investor meetings, including annual meetings with limited partners, adding another layer of complexity for connecting with existing and new investors in the pandemic environment and beyond.

Supporting a remote workforce and enabling large-scale virtual meetings require state-of-the-art technology. Private equity firms’ major investments in technology over the past five years positioned them to respond promptly to these challenges. Firms that could leverage the technology in the back office to manage the remote workforce were better equipped to weather the storm.

Looking ahead, CFOs said they would continue to reinforce technology investment and adjust flexible work schedules as they took further actions to enable a remote workforce. Firms should rightly view this as a successful return on investment and focus on building upon their success to guide how their organization operates in a post-pandemic environment.

While other areas of focus such as environmental, sustainability and governance (ESG) and technology-related priorities may emerge or ebb and flow, most organizations believe that finding and retaining talent that advances their strategy and business model remains a key factor to succeed at asset growth.

In comparing results of this survey with prior surveys, we observed a slight shift in the priorities at the overall organizational level to the talent management front. In the past, managers’ top priority for talent management focused primarily on enhancing middle- and back-office processes. Now that technology and processes are in place, firm managers are focusing more on applying talent management as a lever to drive employee productivity and engagement.

This largely reflects the success of the efforts of private equity managers to deploy technology or process initiatives over the past two years, which has allowed private equity managers to redirect their focus to their people. While gender and ethnic minority representation were focuses in the prior year, private equity managers have shifted even more to address the composition of their talent pool with regard to gender and underrepresented minorities.

In addition to diversity initiatives, private equity executives oftentimes maintain responsibility for determining which functions should be performed in-house. For various reasons, more managers have begun to shift various core, routine functions into outsourcing arrangements, which continues to be most prevalent for the fund accounting and tax functions. This is especially true of smaller firms that may have financial constraints that challenge their ability to have a large and robust internal workforce of which larger, more established private managers have the luxury.

However, private equity firms of all sizes are showing more comfort with outsourcing the traditional and more routine back-office functions, while still displaying resistance to using outsourcing providers in front-office functions such as portfolio analytics. As private equity managers continue to grapple with fee pressures and increased competition, however, the option of using outsourced providers for front- office functions might also be an area of opportunity for savings.

Investors are no longer willing to accept weaker performance related to more ethical investment decisions as they will increasingly seek to build well-performing socially responsible portfolios. Roughly half of investors surveyed currently invest in ESG products and almost half of investors expect their ESG investing in private equity and venture capital to increase over the next two to three years. Only about half of the investors surveyed felt that there were enough ESG offerings to meet their needs. As such, ESG offerings are likely to continue growing to keep pace with investor demand. This partly reflects an evolving investor base that is more conscientious about how its behaviors, including investment activities, can lead to better social and environmental behaviors.

Many investors attracted to ESG strategies believe that this strategy will tap into investments that outperform the general market. In addition, more people — particularly millennials and Generation Z — consider social and environmental impact a key element in their investment decisions. While managers in Europe and Asia are meeting this demand, managers in North America are lagging behind, though we anticipate an effort to catch up. There is increasing evidence that ESG investing may enhance performance, which puts firms that fail to offer ESG strategies at a further disadvantage as investors seek more sustainable investing options.