Leadership battles loom as PE succession events approach

 

London, 31 January 2018 – Over a quarter (28 per cent) of GPs and their teams at private equity funds expect a succession led key person event in the next five years. However, of that 28 per cent, only one in five (21 per cent) feels that their firm has an adequate succession plan in place, according to Investec Fund Finance’s latest GP Trends report. 

  • More than one in eight private equity firms may face a key person event in the next 12 months

  • Only one in five of those expecting a key person event in the next five years has an adequate succession plan in place
     
  • Nearly half of  firms believe that LPs are not happy with their current succession plans
     

Download the report

Within the next year, more than one in every eight private equity firms may be facing a key person event, with 13 per cent of respondents at managing partner level considering leaving their firms. Nearly half of GPs (45 per cent) believe that limited partners (LPs) are not happy with their succession plans.
 
Succession planning has been a key issue for private equity firms over the past few years with a number of firms facing problems on the departure of their leadership.
 
Frode Strand-Nielsen, Founder and Managing Partner at FSN, commented:

“Two things can bring down a firm: how to divide the loot and leaving succession until it’s too late. You see some firms where the Managing Partner clings on for too long and then there is a forced succession if they become ill or have to move on suddenly.”
In a survey of 292 private equity professionals across the world, half of all respondents (50 per cent) felt that their firm had an adequate succession plan in place. However, 29 per cent said that their firm did not have an adequate plan in place while just over one in five said that they were unsure as to their firm’s plans, indicating that the transition of leadership is not adequately communicated if a plan for it exists at all. 

Funding is one of the key issues around succession in private equity firms.
 
Simon Hamilton, Global Head of Fund Finance at Investec, commented: 

“In a sense, GPs are victims of their own success. If their fund has performed well, their stake may have a prohibitively high valuation attached – it’s not a trivial thing for junior partners to buy that stake out, and we’ve had to be pretty innovative to provide the funding that allows that to happen. In addition, the market has seen an increase in PE managers using the value which they have built up in the management company for strategic transactions: motivation for this ranges from acquisitions, strategic partnerships or expansion of fund types and teams.”

Respondents at Managing Partner level were more positive on their firm’s succession plans with 61 per cent saying that their firm had an adequate succession plan in place. However, this drops to 50 per cent for those at Partner level or equivalent and drops further to 41 per cent among below Partner level employees. This indicates that while plans may be in place, they may be held amongst managing partners and have not been effectively communicated to all employees at the firm. 

Simon Hamilton, Global Head of Fund Finance at Investec, commented: 

“Clearly communicated plans for the next generation are essential for leadership teams hoping to leave a legacy and it takes more than naming a successor to secure the future of a firm. Firms need to develop talent and ensure the equity value of the manager does not become prohibitive, thus allowing junior people to buy in and more seasoned partners to exit.”

“There’s also the practical question: one in eight managing partners is thinking of moving on in the next year, but how will they leave? Funding an exit is not a trivial undertaking, and we’ve done a lot of transactions recently to enable a liquidity event for managers, either for succession planning or for further strategic investments, such as buying other funds – there are some attractive valuations out there for multi-fund managers.”