Generational succession took center stage in private markets last year. KKR, Carlyle, Apollo and Blackstone’s credit arm GSO Capital Partners all made significant changes to their leadership teams in 2017, sending clear signals to the market about what they would look like when their founders were gone.
Assessing team stability is important for prospective investors, which want to know whether a key departure would impact the management of the fund or the roster of other investors.
“The question is going to be, if there is a material succession, will there be a flight of investors? What are they tied to? Is it the founders or the broader firm?” asks George Mazin, a partner in law firm Dechert’s financial services and investment management practice.
Here are the top four factors a firm should consider when planning for the future of its leadership team:
- Get the timing right. If it’s done too early, the culture of the firm might not be fully established and identifying the next generation could be difficult. Done too late, a firm runs the risk of losing partners who have? clear expectations regarding their future.
- Identify future leaders. Leaders need to recognise their role at the firm, identify those who could replace them and then put in place a business plan to communicate it to those individuals.
- Structure the economics. A firm must figure out how founders can fade out and share carried interest with more junior partners. One way to do this is to gradually decrease the amount of participation in the carried interest generated by new funds after the founders retire.
- Be prepared for departures. There will be competition between the younger generation over who will succeed, and those overlooked may make an exit. Alex Navab, who headed KKR’s Americas private equity practice and was not picked for the top job, left shortly after the succession announcement.
Succession has been a prominent issue within private equity for some time. For firms in the younger asset classes, such as infrastructure and private credit, major handovers largely lie ahead of them. They will have plenty of case studies – good and bad – to guide them.