Why performance management breaks in private equity, and how to fix it

The PE industry prides itself on rigour. Investment theses are stress-tested, models challenged, DD, portfolio management and value creation managed with discipline. Yet many firms still develop their own people through a light-touch annual review, loosely set objectives and a year-end conversation that is really about the bonus. For a business built on talent, that is a blind spot.

Why the annual model fails in PE

Deal flow doesn’t run to an annual calendar. A deal can go live in March and die in May, and a portfolio issue can absorb a team for a quarter. Objectives set in January are often irrelevant by Easter. Meanwhile, the most valuable feedback — what happened in the Investment Committee, how someone handled a management team, where the diligence fell short — gets lost if it waits until December.

Five shifts that matter

Annual → Continuous
Partner-owned → Individual-owned, Partner-coached
Retrospective → Forward-looking
Subjective → Evidence-driven
Vague → Transparent

Four conversations, not one

The year becomes four short check-ins:

• Direction: what matters this year, which deals and portfolio roles will stretch me, and where I need to develop.
• Progress and opportunity: what has changed in the pipeline, and what exposure I now need.
• Depth: honest feedback (moments of truth) on performance, drawing on deal debriefs, and an early signal on anything off track.
• The year in the round: what changed, what was learned, and what comes next.

The individual books each conversation and writes the record. Partner time is scarce, so the Partner’s job is to coach, not to administer.

Lose the ratings

In a small investment team, a rating quickly becomes a proxy for the bonus pool. Remove the score and the ranking, and the conversation moves from defending a number to discussing the work.

Separate development from reward

When feedback and bonus or carry are discussed in the same meeting, people hear only the number. Hold the last development conversation well before the bonus round, and communicate reward separately. The “no surprises” rule applies: anything that appears for the first time in the bonus conversation reads as after-the-fact justification.

Objectives with a standard

“Support three deals to completion” is an activity. Nothing in it separates a strong year from a weak one.

“Own the diligence workstream end to end on two live processes, to a standard where the IC paper can be drafted from my output without rework” is a contribution.

Likewise, “Improve my communication” invites a conversation about personality. “Present at IC twice and hold the recommendation under challenge without escalating to the deal Partner” names the forum, the behaviour and the evidence.

Takeaway

Competition for talent is intense, and the best leave when they can’t see how to progress. Firms that give clear, regular and evidence-based feedback don’t just develop better investors. They keep them. PE applies discipline to every investment decision. Applying the same discipline to its own people is a sensible expectation.

MM&K helps PE firms design career frameworks and performance processes that are simple, commercially grounded and built around how investment teams actually work.

MM&K is a leading independent adviser to PE firms and their portfolio companies on the design and implementation of human capital solutions and tailored pay structures. If you are curious and want to explore how MM&K could assist your Board to optimise the advantages of aligning pay, strategy and culture, contact Rob Miller (robert.miller@mm-k.com) or Stuart James (stuart.james@mm-k.com).

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