1099 vs W2: which is better for private equity portfolio operations hires?

Portfolio operations teams are gaining traction in private equity firms that hinge their investment strategy on making meaningful improvements to the companies they sponsor.

Firms will either deploy these teams across multiple portfolio companies to advise and assist on value creation initiatives or embed them in a single company to apply a playbook of strategies that drive growth.

However, the first question many private equity leaders ask themselves after deciding to invest in a portfolio operations team is whether to hire these leaders on a W2 or a 1099 basis.

Often, this decision depends on how a firm plans to pay for their team. Sometimes the firm will bill the portfolio company for this level of talent, but other times they will be employed by the private equity firm. In this article, we’ll explain the pros and cons behind hiring portfolio operations leaders on a W2 or a 1099 basis at the fund level.

The difference between W2 and 1099 portfolio operations leaders

W-2 workers are employees whose taxes are withheld and reported by their employer, while 1099 workers are independent contractors who handle their own tax withholdings and payments.

The main difference for W2 and 1099 workers in private equity portfolio operations is compensation. W2 employees usually earn some form of equity or long-term incentive, as well as a benefits package. 1099 contractors typically earn cash only.

The pros and cons of hiring private equity portfolio operations leaders on a 1099 contractor basis

Pros:

The main benefit of hiring these individuals on a 1099 is that it allows firms to “try before they buy,” which is especially useful for net-new portfolio operations teams with a scope or structure that’s under development. The flexibility of hiring someone with no equity stake in the business gives the firm time to figure out what they actually need when they want to hire a full-time W-2 employee.

For example, we recently spoke with a global financial services firm that wanted to bring in specialized portfolio operations talent (AI, talent, finance, etc.) but didn’t have the budget to justify full-time hires. They had clarity about what they needed but weren’t ready to commit to building out a full W2 team. Hiring on a 1099 basis gave them the flexibility to test the model without locking in a long-term commitment.

Additional pros:

– 1099 is good for short-term project work, particularly when the required expertise is highly specialized and only needed for a defined period.

– It enables firms to scale resources up or down quickly as priorities shift, without the administrative or financial overhead associated with onboarding and offboarding full-time employees.

– It can be an effective way to tap into senior-level talent that prefers project-based consulting over permanent roles, allowing firms to access a broader range of skills and perspectives.

Cons:

While 1099 contractors offer flexibility, they rarely feel like full members of the team, and in our experience, will always take a call from a Charles Aris recruiter to discuss their career. Without the same level of commitment or alignment as a fully employed W2 worker, they tend to keep their options open by taking interviews, entertaining job offers and evaluating their next move before they’ve finished the current one.

That mindset can filter into the work. You may get strong technical output, but you’re unlikely to see the level of ownership required for a well-rounded cultural fit.

Additional cons:

– Limited integration into internal processes, which can slow execution and create inefficiencies when projects require cross-functional collaboration.

– Less predictable availability, as many contractors juggle multiple clients and may not be able to prioritize urgent requests from your team.

– Missed opportunities for long-term institutional knowledge transfer, since 1099s typically disengage after project completion.

Comparison of W2 vs. 1099 across key hiring criteria

This chart clearly summarizes where 1099 and W2 workers differ across key hiring criteria:

Considerations for your portfolio operations hiring strategy

When deciding between W2 and 1099 hires, context is everything. 1099s can be a strategic fit for experimental roles or when you need short-term expertise without long-term commitment. There’s no shortage of talented people willing to break into private equity, and many will take a contractor role to get a foot in the door.

However, when the goal is to build long-term value, institutional knowledge and cultural alignment, the most effective portfolio operations hires are full-time, incentivized employees who share in the long-term success of the business.

To learn more, contact Amanda Rutherford at (336) 217-9161 or amanda.rutherford@charlesaris.com.