Success in succession: Are Private Equity partners thinking big enough?

14 September 2021

6 minute read

For many businesses, particularly those at the top of the finance industry, continuity planning is nothing new. Having a clear roadmap for how to replace one leader with another – either in an emergency or as part of long-term strategic planning – makes perfect sense.

However, Private Equity houses are an outlier in this respect. Some delay succession planning, because their founders are either unable or unwilling to envisage life beyond the business – especially if it is eponymous and the embodiment of the leader.

This dynamic was brought to life by recent EY research1 [PDF, 1.74MB] showing that Private Equity managers ranked succession planning as their bottom priority in a list of seven that included asset growth, ESG initiatives, and technology. That priority falls even lower for the survey respondents who manage the highest volume of assets.

Not only is that a risky notion for investors, it also hinders the long-term planning of the partners themselves, with regards to the nuances of their self-made prosperity. Having worked so hard and for so long to create wealth, it’s counter-intuitive to leave it to the mercy of last-minute planning.

In this article, we explore the unique succession challenge facing these firms and, in particular, what it means for the individuals at the top. 

The challenge of pioneering an industry

Changes to the rules affecting financial services companies, combined with new appetites within investor circles, led to a spate of Private Equity start-ups in the US some 50 years ago, followed by debutants in Europe and, more recently, Asia. Since then, the industry has ballooned, generating $539 billion in global deal value in the first half of 2021 alone, according to Bain & Company.

Many of the early Private Equity founders have reached their 70s and 80s, meaning retirement is just around the corner. But as pioneers in their market, they are also the first to handle the transition to life after business, both for themselves and the companies they founded.

Large, global Private Equity companies have formal succession plans in place, but among smaller shops, where in many cases the founder’s name is synonymous with the business’ success, there are questions to be answered.

For example, how do you retain investor confidence when the founder leaves? Do you mothball the business by closing its funds, select a replacement or prepare the business for a buyout? After all, interest in stakes from the likes of Dyal Capital Partners and Blackstone in Private Equity companies has been growing for some time, so much so that almost 42% of eligible firms have sold stakes to a fund, according to 2020 figures from Pitchbook.

Preparation is key, says James Williams, Managing Director, at Barclays Private Bank serving Private Equity clients.

“At the investor relations level, mid-market Private Equity houses will face questions on a daily basis about the plan should someone fall ill, leave or retire.”

“The plan must be very clear and well-communicated. You don’t want people to feel that change is imminent if it isn’t, but they need to know the succession plan is there when change does arise. Due diligence teams pay close attention to key person risk.”

But while planning for the future of the business is important, preparing a personal journey is also vital at the conclusion of a Private Equity partner’s career.

The question of succession

Over the course of a long working life, Private Equity leaders build complicated financial footprints which need structuring and planning well ahead of their final day in the office.

“The role of the banker is to acknowledge the client’s profile and transition the financial portfolio to a much more diversified and liquid set of positions,” adds Williams.

It’s likely, for example, they will have a carry of illiquid investments wrapped up in the funds the business launched in the years leading up to succession. So, it’s normal to have a decade’s worth of carry to factor into retirement plans.

Then there is usually a global property portfolio, as well as the cash pot partners develop over their careers to finance investments, but also to pay for their homes, vehicles, children’s education, and the general cost of living.

This cash amount tends to swell after the age of 50, when the most costly period of people’s family life is in the rear-view mirror. They may also be non-domiciled, a US citizen living in London, for example, meaning that currency and jurisdiction factors come into play.

It’s a complex personal picture, so Private Equity partners need to be speaking to people who understand their world, the complexities of their finances, as well as their motivations, values, and aspirations.

Understanding the Private Equity partner is important, says Francisca van Dijken, Director, at Barclays Private Bank, because advisors will tailor investment decisions to fit each individual’s personal needs.

“Having analysed concentrated holdings, advisors will plan for diversification and liquidity. They look at the client’s funds as well as their personal situation because they might have been paid with stock, or the fund might have a concentrated currency exposure.”

The opportunity to build a legacy

Philanthropy is almost always central to a Private Equity partner’s vision of life after business, whether the plan is to establish a foundation, give a large charitable donation, or fund the arts, education, medicine, for example.

“It’s a key concern for retiring Private Equity partners,” says van Dijken, who oversees a team of specialists looking after the needs of international clients in the Private Equity ecosystem.

“It is almost always at the forefront of what they want to do when they exit their business. So, it’s important they find a very robust service to support how they go about distributing their wealth.”

The time to plan is now

Most founders think like masters of the universe. Their ‘plan’ is to go on forever and they’re reluctant to even think of retirement. It makes the adjustment from leading an organisation to walking out the door a tricky one, not to mention the complex considerations that come afterwards.

But planning the future of the business, as well as personal life after the office, is a long process, so it’s important to start in good time, ensuring the business and the founders have time on their side.

If you have any questions about this topic, please do contact your Private Banker.

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