Insights from the Operating Partner (Virtual) Forum - June 2021

On Thursday, June 24, Accordion invited a (virtual) panel of Operating Partners to discuss the nuances of the ‘new workplace’ from both a sponsor and portfolio company perspective.

What we heard differs fundamentally from previous forums, which had focused on the economics of the pandemic: cashflow, dynamic reforecasting, leading/lagging indicators, etc. What we heard this time centered on the people, indeed the very human, issues at play in a post-pandemic world. We learned that the workplace is in fact ‘new,’ and the policies for return to the office are complicated, dynamic, and diverge from sponsors to their portfolio companies. We also learned that the war for talent is not only very real, but complicates the discussion about where PE work will be done in the future.

Here are a few of the headline learnings, lessons, and takeaways:

Return to the Office: The Macro Environment

There’s a certainty to the state of the PE environment. The deal market is at hot as it’s ever been, and the war for talent on all sides of the equation has never been more intense. But there’s a rivaling uncertainty to how those deals will get done, who is available to do them, and from where those employees will be located, now and in the future.

“Where is the industry right now? Obviously we’re in a massive bounceback. But the return to the office situation is dynamic and exceptionally fluid.”

“A bunch of companies are in the office right now at the sponsor and the portfolio company level; a bunch are thinking about when to come in, and a bunch are thinking about the trade-offs: between employee engagement from coming into work vs. the employee value proposition of working remotely and hybrid models. There are a lot of questions and conversations and not a lot of easy solutions.”

Return to the Office: The Sponsor Sentiment

Many sponsors are leaning in to the ‘soon’ solution.

“At the firm level, our offices have been open since June. Right now it’s optional only. September we will be ‘officially’ open in a more mandatory way.”

“We haven’t done many in-person portfolio meetings yet. Those are still via Zoom and remote. We’re now teeing up some due diligence that will likely be in-person closings and signatory type discussions, which will take place over the next couple of months.”

“One of the things that we have done from an engagement perspective is just acknowledge and communicate with the team that we’re not actually bringing people back before Labor Day. We’re saying to them in an open way: Look, we recognize you’ve been working very hard and long hours at home and it’s summer and keep doing that. You’re going to work hard, but we’ll come back to the office after the summer. “

Others are leaning into the ‘now.’

“We’re back. Mandatory at work from June 1st – four days a week.”

“Our founders sent out a note with the subject line: ‘Come on back.’  It was very clear that this firm was founded on a culture and set of values and an apprenticeship model that would not work in any kind of hybrid model. They want us in the office.”

“It is an apprenticeship profession right? So if you’re not with each other, you’re not getting apprenticed. We are back, but the culture at the office is a lot more casual, so everyone is in t-shirts and jeans at least until September.” Still others remain uncertain, at best, and frustratingly inarticulate, at worst.

“We’ve had a very wait and see the approach and frankly, our employees are going to get frustrated by that. And that’s going to become more and more of a challenge if we don’t all start to actually put something on paper and solve it pretty quickly.”

Return to the Office: The Portfolio Perspective

What is quite clear, however, is that where sponsors have leaned-in toward return (even if that return is post-Labor Day), they are not directing their portfolio companies accordingly or uniformly.

“For PE, it’s a tale of two very different cities: firms are back in business as usual. Our portfolio companies are more remote friendly.”

And while these firms are offering guidance, they’re typically not using a heavy hand.

“We are much more advisory than dictatorial in terms of what our companies do. So it’s more about helping them generate ideas and letting them come up with solutions for themselves.”

“You have to take company-specific and situation-specific approaches to this. We’re all dying for the playbook. I don’t think there is a specific playbook. I think there are a series of questions that you have to ask each of the organizations and then really custom fit to what the needs are.”

“We’re a fairly large firm from a portfolio perspective: from chicken farms to software companies and everything in between. The policies that we’re seeing echo that diversity. I don’t think we’ve seen anything on either extreme: meaning everyone goes virtual forever, or everyone in-person right now.”

Of course, there are always the the outliers to the flexible approach.

“We have one company that’s gone on record re: mandating employees return in August, which has actually caused a fair amount of backlash at the company. There’s a fine line between letting our management teams make the decisions that they want, but also trying to manage that. Inherently the messaging that went out with this was that you’re not as productive at home.”

The Role of Good Management and Messaging

Operational partners are quick to note, however, that the way any return to office policy is communicated can be just as important as its content.

“In the case of that extreme company, if they were to have articulated it better, I think the employee backlash would’ve been very different. I think the problem was more or less in the messaging of it. it wasn’t messaging that reflected what most employees experienced throughout the pandemic. The management team took a very hard line.”

That hard line, many OPs argue, is not in any portfolio company’s best interest right now.

“Being inflexible is the worst thing I think portfolio companies can be now. We have some CEOs that are highly flexible and some CEOs that are less flexible. The CEOs that are flexible are doing much better because they are accustomed to the idea of test and learn experiments, communicating with the organization, letting them know it’s not going to be perfect. You’re trying things out.”

The Hybrid Solution

Flexibility, however, brings with it its own set of challenges – particularly when that flexibility is misunderstood, not clearly articulated, or left to an employee’s discretion. Such is the case with the hybrid return to office concept.

“The other feedback I’ve started to hear is that the hybrid approach – as in you can come in now or you can work from home – has been difficult. People seem to be frustrated on both sides, the ones who are not in the office, the ones who are in the office. So trying to have meetings and have folks in the room and on Zoom for the couple of companies that are experimenting with it has not been terribly successful.”

“I think for hybrid to be a success, everyone can’t have their own interpretation at the individual level of what hybrid means.”

“For companies that are trying a hybrid approach, I have yet to hear anyone’s policy that has any sort of meat on the bones. Nobody knows if I work on the marketing team, does that mean the marketing team comes in Tuesday and Wednesdays? Or does that mean people with last name’s H are D coming Tuesday through Wednesdays. These are the issues that have not been solved yet and it creates a ton of distraction amongst the employees, reduces productivity, and impacts the bottom line.”

A clearly articulated  hybrid solution may be the key toward winning the hearts and minds of employees.

“I just think that the companies that can solve this hybrid nut and get this right from a communication standpoint are going to be at such a recruiting and retention advantage.”

The Hybrid-Enabling Technology

Even when they have the policy addressed and well-handled, sponsors and portfolio companies will still have to figure out the nuances of the enabling technology. Remote work was one thing….hybrid technology needs are quite another.

“There’s a technology investment that companies have to make here to enable a hybrid workforce. And there’s a meaningful cost associated with that, that some companies who struggled during COVID are going a hard time paying for.”

“We are anticipating a huge bandwidth issue once we come back into the office, because Zoom is now going to be a much bigger part of our lives that we didn’t have before. So that’s just going to add a huge bandwidth trap challenge.”

“We all think we have 15 months of experience sitting in front of a Zoom screen and we’re experts. But as soon as you’ve got four people on Zoom and six people in a conference room with traditional video conferencing capabilities and questionable audio in the video conference, suddenly the whole thing goes from 15 months of remote working actually working, to it doesn’t work. And I view that as a technology problem.”

The War for Talent: Portfolio Companies

Of course, where to work is only one question facing the post-COVID PE landscape. Who will do the work is another. The war for talent is a fight almost every portfolio company in every industry across every region is facing. The post-pandemic period has created an employee marketplace. How portfolio companies respond to this newfound employee leverage and whether they can adapt to changing demands will likely determine which companies win the broader recruitment and retention battles ahead.

“We’re certainly seeing that more senior, older workers are by and large coming back to the office and younger workers are not, and that could play itself out over time. I think it speaks to the whole war on talent: younger workers have decided this is fundamentally how work can get done now. I think we either learn to accept that one way or another, or those employees start going to find a different place to work.”

Whether what the employees want is really what they need, however, is another question entirely.

“I think for kids coming out of college into their first job, remote/hybrid work is enormously damaging. They have no idea what they’re dealing with. They have no network at the company and so we see a lack of productivity and disengagement and no connection to the business.”

Questions about what employees want and need aside, the one thing the war for talent has done, with certainty, is to make the recruitment “battlefield” bigger.

“We just did a big carve out deal and we have to stand up several G&A teams and recruit, 40, 50, 50, 60 people in finance, HR, etc. We didn’t know if we should be recruiting people all over the country, or if, as things return to normal, we won’t want people in 40 different states. But we didn’t have the luxury of having that conversation: we need people now. There’s a talent shortage, so the ‘meet them where they’re at’ strategy wins.”

“It has certainly opened our eyes to a much bigger national talent pool.”

The War for Talent: Sponsors

The war for talent is not exclusive to portfolio companies, however. It’s a battle being waged by understaffed PE firms in a hot deal market.

“Our biggest lever is we are just understaffed. I don’t know that any of us have seen a deal environment quite like the one we’re in now. And so how do you add 25% more associates so that the associates themselves that are on the ground have room to breathe right now? Just getting those staffing ratios right and really understanding that coverage model is super important.”

“We’re diversifying the backgrounds that we’re looking at. We are willing to take people from different backgrounds and then invest in their training to get them up to speed through what would have otherwise been through that typical IB (and ivy) experience.”

Recruiting is, of course, only half the people “battle.” Winning the war will require retention of that talent.

“Once they get here, there is now a need for more informal mentorship; making sure that certain people have touch points at different levels within the group, that people are getting looped into the right opportunities, etc. We are having more consistent and informal feedback in our firm.”

“There’s a lot of deal activity going on and we are thinking about creative ways that we can spread the financial love to folks who are working very hard on selling companies, on buying companies, and just keeping them motivated and engaged.”

“As a pretty hard charging founder-based company, we’ve made concessions for retention that I didn’t think we would. We opened up a Florida office last month. Had you told me pre-COVID that one of our highest VPs would say, ‘I’m going to do this and not be in the New York office,’ I never in a million years would have believed we would have allowed or enabled that. But now, it’s the case.”