Why flexible lending boosts succession planning
Over the last 30 years, some private equity (PE) houses have evolved from a founder-led model to institutional brands with multiple funds. However, that is not the case across the board.
For many PE firms thinking about succession planning, passing on the baton is a delicate balance to ensure investors and talent are reassured about its long-term strategy. Failure to appropriately plan ahead can easily derail a general partner (GP)’s strategic ambitions.
Succession planning for founding and existing partners seeking an exit (often due to retirement) focuses on the next generation. However, junior partners ready and willing to take on more responsibilities often need access to capital to buy their place at the top table.
If junior members are unable to secure an equity participation in a fund, then succession intentions might be thwarted. This can have a knock-on effect for the firm’s talent retention.
This makes it crucial to work with an agile and flexible lender who can provide sound, bespoke financing solutions. These must address not only continuity in the fund manager’s leadership team but also pay detailed attention to individuals at different stages in their careers.
Financing solutions for succession planning are most effective if they are tailored for both the personal career aspirations of the next generation and the fund’s investment strategy. Consequently, the best financial products are not ‘one-size-fits-all’ as they are solving a unique, fund-specific requirement.
Setting financial and strategic objectives
Looking more broadly, succession planning isn’t solely an internal consideration. Increasingly, external investors look for evidence that a PE firm’s future leadership structure has been clearly mapped out.
Investors will expect reassurance about a firm’s stability before making a financial commitment and that there is no ‘key-man risk’, for example, losing vital business knowledge when a founder leaves. Limited partners (LP)s will want to ensure that their investments are in trusted, experienced hands.
Therefore, a succession planning strategy serves multiple objectives. First, it enables newly promoted equity partners to be more closely aligned with long-term business plans as they are personally invested in a fund’s success. Second, it provides a fund with greater certainty about its future management.
Third, good planning can help firms fulfil their diversity and inclusion goals by promoting fresh faces to senior roles. This is also important for attracting new talent, who are likely to arrive with equity aspirations of their own. A younger generation will want to see evidence of a clearly articulated career path to the top, which is key to attracting high-performing professionals and, crucially, encouraging them to stay.
Furthermore, a diverse workforce is increasingly important to both internal and external stakeholders to improve the reputation and perception of a firm as well as boost morale and motivation within. Greater diversity leads to superior value creation for PE firms.
Succession planning steps for a smoother transition
From our experience working with GPs and our wider discussions with industry professionals, we have identified the following key areas that can smooth the process of succession financing:
Look for flexible finance structures
Lawyers and debt advisors have remarked that the objectives of a finance facility implemented for succession planning are not always clear. For example, the purpose of the facility may not be readily apparent from the loan agreement, as the genesis of such products is borne from highly sensitive and confidential internal discussions.
That means GPs need a lender who will take the time to really get under the skin of their client. By doing so, the lender can fully understand the individual’s personal wishes in the context of the objectives of the fund in order to provide customised loan structuring options. This will then also cater for the GP’s strategic capital needs.
That said, the core commercial terms of the product, for example, pricing and tenor, along with the recourse package are often comparable to traditional GP lending facilities.
Take the time to prepare the succession process
Our experience is that finance for succession planning cannot be rushed and often takes time to execute. It is therefore critical to engage with potential lenders early in the process to ensure a considered approach.
Lenders are usually working with multiple stakeholders simultaneously to complete a transaction. They have to be acutely aware of any challenges or hurdles to implement a sound, fit-for-purpose financing solution.
Find the right lending partner
External advisers have commented that there are relatively few players in the lending market for GP facilities and the pool of lenders with experience in succession planning solutions may be even smaller. A lender will often take a wider, relationship view of its appetite to provide these facilities as they are typically relatively small and complex in nature.
Succession supports diversity
We believe effective succession planning is intrinsically linked with the push for greater diversity, especially encouraging more women in senior roles. Although the PE industry has traditionally been behind the curve in this respect, in recent years GPs have been keen to change that perception. Diversity of thought is at the forefront of their strategy.
In our upcoming Private Equity Trends 2024 report (due to be released January 2024), 44% of nearly 150 GPs surveyed said their firm had appointed a female or ethnic minority partner in the last year. The figure was 27% for GPs with less than $1 billion of assets under management.
Interestingly, efforts to improve diversity seem to be further advanced in UK and European PE markets compared with their US counterparts. There is growing evidence that greater diversity in organisations creates more profitable business.
Embracing specialist lending choices
GPs and fund managers looking for equity participation need flexibility in loan arrangements. They want lenders who offer long-term support in a holistic approach that extends beyond a client’s borrowing needs. Given the complexity of these facilities, lenders have to be in tune with tailor-made succession planning principles which can support their career ambitions.
We are one of a few global banks offering GP financing as a dedicated fund solutions specialisation. With over 15 years’ experience structuring bespoke financing options throughout a fund's lifecycle, succession planning considerations are integral to our long-term approach with PE clients.
Looking at firms that have strong succession planning in place tells us that it pays to tackle the task sooner rather than later.
If you would like to find out more, contact Nicola Rodrigues, Laura Moss and Helen Griffiths
Head of Structuring
Head of Structuring