Key factors for succession planning
With swathes of PE and VC houses looking towards creating succession plans, we hear from two firms about their recent experiences.
“I do believe that the Achilles’ heel of any asset management firm is succession… there have been a number of companies that have foundered over that, or a number of companies that have put it off indefinitely.” So said Blackstone’s Tony James following the firm’s succession plan announcement, which saw him move from COO to executive vice chair in February 2018.
Blackstone’s succession plans followed those of its large-cap peers, with Carlyle, KKR and Apollo all outlining new leadership structures in the past two years.
Bulge bracket players have not been alone in the process; in Europe, Apax, EQT, Exponent Private Equity, Epiris, ICG, Eurazeo, Silverfleet, Pamplona, Activa, Halder, Partners Group, HQ Equita and Segulah represent a selection of mid-market managers to have agreed and announced plans.
However, there’s still a long way to go, with many firms yet to decipher their next phase of management. Speaking in an interview earlier this year, SVB’s Namita Anand said: “Succession planning is a major talking point; of the last 50 conversations I’ve had, I’d say around 40 were on this. Many funds haven’t made succession plans and are rightly starting to think about it.”
Trouble with succession planning is…
Succession planning touches on hugely sensitive areas involving egos and strong personalities as well as personal career plans, meaning there can often be a lot of emotion involved in the process. On top of these factors, the decision requires group consensus, which risks major disputes and, in some cases, dismantling of entire firms.
Furthermore, not only is succession planning vital to ensure a firm’s continued culture, it is arguably dependent on a firm’s culture; those houses with an ethos of consistently looking to the future and fostering an environment of open and frank communication are far more likely to experience a smoother process.
Silverfleet Capital Partners is an elegant example of this. “It has something to do with having been operating for such a long time,” says the firm’s newly appointed managing partner Gareth Whiley. “It’s to do with our institutional heritage; we were originally part of Prudential. It is also linked to not having our name above the door; our culture has always been about the longevity of the firm.”
Silverfleet completed its succession plan in April 2019, following an announcement in November 2018, with former managing partner Neil MacDougall taking on the new role of chair as Whiley took on management responsibility.
With initial and informal conversations between MacDougall and Whiley taking place back in late 2017, a key driver of devising the plan was fundraising. “Neil and I have worked together for 20 years or so, and he didn’t think it would be appropriate to lead the next fundraise. In terms of good governance, it was time to think about who would take over.”
According to Whiley, the subsequent discussions were open, taking into account major questions such as how it would work, how quickly it would happen, and potential co-managing options.
For Paris-based Activa Capital Partners, the situation was less clear and therefore lengthier. Following the raise of its third fund, the firm made a crucial step towards a potential plan, with management of the new fund’s operations to be led by Christophe Parier and Alexandre Masson. “The founding partners remained in charge for funds one and two, while we led all investments on fund three,” explains Parier.
But it was only after fund three was 50% deployed that the real discussions kicked off. “We had to invest the fund successfully; that’s why the 50% investment rate was important,” says Parier. “By the time the succession discussions gained momentum, we had made five investments, there was serious value in the fund, and we were negotiating the fund’s remaining deals. We had looked after the operations and managed relationships with the portfolio companies as well, so it was the good timing to share our views on the firm’s future,” adds Masson.
For a few months, discussions took place with the founding partners to negotiate who would do what and how. The result was for two of the founding partners - Michael Diehl and Philippe Latorre - to become senior advisors and sell their shares to Parier and Masson, while the other founding partner Charles Diehl moved to the role of chair. “We presented this plan to our LPs, who voted on it unanimously, and then it was all signed and paid for,” says Parier.
In both the Silverfleet and Activa cases, the need for due process, and communicating clearly and at the right time to LPs was vital for plans’ success.
Both firms established open internal processes, whereby any team member wishing to take on leadership was able to put their name forward. And both GPs ensured fairness by putting plans forward to be voted on – first by the team itself, and once agreed upon, to LPs.
“We explained to our investors that in five months’ time, leadership would be handed over, with a two year interim process,” explains Whiley, who adds that there were some initial questions and reactions from the investor base, such as if the negotiations had caused any upset, if there were other reasons behind the succession such as illness or a breakdown in the team’s relationship. “After explaining the reasons, they were all very happy,” adds Whiley.
Activa’s experience was similar. “We were very eager to do something smooth; something friendly, and be able to collectively stand in front of our LPs and make it clear that we’re doing this together,” says Parier.
Given the highly individual nature of determining succession plans for PE and VC houses, it is not a topic where advice can easily be sought.
For Activa, few people outside of the organisation knew about the process, let alone were asked for help. “We carefully looked at what was happening in other firms. We had some informal discussions with very close friends, where we sounded out ideas, but we decided to keep it internal,” says Parier.
For Silverfleet, some guidance was found close to home. “On a very informal basis, I checked in with CEOs and chairs of previous portfolio companies about their learnings. That was great, and brought about some excellent lessons, one of which is that succession is a chance for change; an opportunity to see if we can improve and be better,” says Whiley.
There was one other external party able to help Silverfleet: “For many years we had worked with a head-hunter who had carried out some psychological profiling with us. We spoke to him about if there were any risks. It was useful to speak to some third parties and ask if there was anything to watch out for; anything in our characters that might inadvertently come out,” adds Whiley.
Succession planning and firm culture are two sides of the same coin. Those firms with a culture of long-term success, of clearly understanding their fiduciary duty to investors are far more likely to experience much smoother processes. For houses dependent on key founding members, who dictate investment strategy, execution and investor relations, deciphering how to safely pass that on to the new generation – and working out who the leadership is – will likely be more challenging.
Thankfully, regardless of the firm’s culture or particular situation, there are some common threads running through all succession plans: ensuring the process is as open and fair as possible; only communicating plans to LPs when there is a substantial plan in place; and seeking advice only from those who know the team well.