The shift to operational value creation is creating one final challenge for the private-equity industry. As the staffs at private-equity firms become bigger—and include people with backgrounds and disciplines that go beyond the financial expertise of the industry’s early years—these firms’ organizations are becoming more complex. This complexity will force firms to professionalize their management processes.
In a sense, the private-equity industry faces a situation not so different from that of a successful start-up that has become a big company. The ad hoc practices that worked well during its early years are no longer effective. Instead, the company has to take a more structured approach to key internal issues. So, too, do private-equity firms today.
More professional management does not necessarily mean more bureaucracy; it can be achieved in ways that preserve the flexibility and fast decision-making of the traditional private-equity organization. What it does mean, however, is paying closer attention to key internal processes that govern how employees are developed, how they are compensated, and how they work together.