4 Steps to Succession Planning in Private Equity
Looking after the next generation and navigating succession has always been a hot topic in private equity. While succession planning is undoubtedly important for the continuity and sustainability of any business, it can be even more trying for private equity firms.
Below Jean Pierre Conte, the Chairman of a multimillion dollar private equity firm, Genstar Capital, talks CEO Today through the intricacies of private equity and explores some of the steps behind succession planning in this sector.
Traditionally, private equity firms buy businesses for their portfolios, facilitate rapid performance improvement, and sell them over three to five years. Without fail, problems at private equity firms arise because of one thing – ego.
When things go wrong, boardrooms can turn into a nasty brew of money, power and conflict with founders holding on to equity and partners either planning a coup or quitting. It can get ugly, and fast. Firms blow up all the time. They literally stop existing. Over the course of my career in private equity I have learnt a number of strategies which help to safeguard against this avoidable risk.
The key to successfully navigating a succession plan well and ensuring you hold on to top talent and nurture a team, is culture.
Firstly, private equity firms are what I call ‘human capital’ businesses, so they’re driven by people, the main assets go home at night. That next generation is so important to keep it going – but if you fall at this hurdle you end up with a firm that’s sub-optimised; people aren’t that compelled or excited to work there. If that happens, the returns really plummet and then they can’t raise capital. It’s an issue unique to private equity.
The key to successfully navigating a succession plan well and ensuring you hold on to top talent and nurture a team, is culture. At Genstar, we try to run our firm so that it continues to work whether I’m there, or the next guy or the next guy – and it’s not so fragile that if one person leaves, it blows up.
The Importance of Culture
At least once or twice a year management should go through an exercise of defining their mission and values – it’s pretty important to remind people what they’re all there for. The culture can be a function of who you hire, promote and fire, so bad apples tend to fall off the tree naturally.
Usually, when we are looking at buying a company, the CEOs want to work with us. This is because we seek to encourage a low ego, high EQ, high IQ environment, so we truly partner with these management teams and we become a partner of choice for a management team.
A good private equity firm should be able to collaborate internally, with multiple teams working on different projects, you don’t want to create little kingdoms where one area is competing with another area – they’ve all got the same vision. In short, a collaborative working style, apolitical – where you’re not trying to outmaneuver someone else.
A good private equity firm should be able to collaborate internally, with multiple teams working on different projects, you don’t want to create little kingdoms where one area is competing with another area.
Trust in the Next Generation
Taking risks on the next generation and showing trust in younger team members is essential. Give people more accountability at a younger age so they get more time with management teams and the investment committee. You’ll find they become much more accountable for the success of a deal. Management should include everyone in discussions in a big way; you shouldn’t exclude certain people from meetings unless you can explain why they shouldn’t be there.
Ultimately, it’s about creating an environment where there is a high level of trust. This leads to a functional environment where decisions are made quickly and thoughtfully, so you can maneuver faster. As a counterargument, some of these bigger shops that have become truly dysfunctional in terms of their ability to make quick decisions, or clear decisions, become difficult to work with. Whether you are manager, investor, or shop floor worker, this can have extremely serious consequences.
Learn to let go
It’s surprisingly rare that succession is done well – it’s why it’s such an interesting topic, and why so many people ask me about it. In my experience, greed typically takes over. Unfortunately, it’s very common for people to hang on to personal profit, overstay in senior positions, and wind up alienating the next generation – these firms inevitably blow up. In larger firms, you also see a lot of senior partners holding on to too much carry and ownership.
I believe that the most productive years of a private equity executive is 36-46. If you think about that time period, they have a lot more experience, they’ve got a toolkit, they’ve got a network, they’ve got confidence, and they’re still hungry – there’s still a lot of striving – those are the ideal years to be leading deals. I think once people are out of that, if you’ve got a firm where over 20-30 per cent of the senior leadership team are over 46, you’re going to have a problem.
So, for people who are over that age, there needs to be less emphasis on personal profit to give the next generation the opportunity to generate more wealth, and more profits for the firm to provide the foundations for a stronger legacy.
Those leaders generally over the age of 46 can serve an important role in sharing deal experiences, wisdom and coaching, and most of their compensation going forward should come from investing in the deals without a promote on fees.