We at Alpha observe that a growing trend is emerging in the Private Equity industry – namely that we are currently in a ‘transitional’ period where firm founders are either retiring or expect to be retiring over the next three to five years.
The prospect of a founding partner moving on poses a number of potential challenges and firms will need to manage these through careful succession planning. Conversely, such a major transition also provides firms with a great opportunity to take stock, review their operating models, and re-evaluate their priorities going forward.
The problem with succession:
In Private Equity, many general partners (GPs) are (correctly) viewed as founder-centric institutions which means firms should expect to be asked about their succession planning as part of their fundraising activities. If limited partners (LPs) have cause to doubt that a fund is equipped to deal with a generational change, either because of concerns around the long-term motivation of the most influential staff or because they are unsure about the ability of the firm to ‘move on’ from a founder exiting, it will lead to added difficulties with raising capital in an already challenging environment.
Succession is a frequently discussed topic in Private Equity, with a 2019 survey of GPs showing that nearly one-third of respondents (31%) anticipate a succession-led key man event at their firm in the next five years (see below). Firms will need to demonstrate a coherent plan to satisfy investors that they can navigate a transition like this – failure to do so could lead to a period of real strategic uncertainty in an already challenging market environment.
Questions firms should be asking:
Any impacted GPs should consider the following questions:
- What are our top priorities in order to steer through this transition, and have we got a plan for achieving these?
- How do we best capitalise on this departure to the benefit of our stakeholders and ensure that key relationships are maintained?
- What new technology and operating models will ensure that the business is efficient and scalable for the future?
- How do we build on the founder’s legacy and ensure that valuable cultural and traditional aspects are maintained?
- How prepared are we to replace leadership and direction at the firm?
In Alpha’s experience, GPs have often sought to tackle operational problems through headcount increases rather than by investing in new or upgraded technologies. Additionally, high profit margins mean that spiralling internal costs have not been high priorities for many firms. However, as market pressures resulting from COVID-19 drive firms to consider new efficiencies, Alternative Investment firms already going through a ‘generational change’ linked to succession have a real opportunity to successfully transition their business and in turn reassure investors.
We have noted that the Private Equity firms who negotiate succession planning are those who see it as a chance to consider their business models with reference to those more associated with traditional institutional asset management. This includes a full evaluation of their operational functions and technology stack while considering where efficiencies are being lost due to long-standing but outdated ways of working, as well as paying renewed attention to areas which have ‘lagged’ in the industry such as customer experience and digital transformation. Performing these reviews and developing a clear plan to drive the business forward results in an organisation with momentum at a potentially challenging time and reassures LPs and potential investors during any awkward conversations about succession.
Alpha has significant experience in supporting Alternative Investment firms define their Target Operating Models, and because we implement major transformational projects our consultancy is firmly rooted in practical experience. As part of our operational reviews, we work with firms to consider their outsourcing relationships, review technologies used and define and implement data strategies for the future. We also support Alternative Investment firms who are looking to upgrade their distribution technology and achieve a best-in-class client experience. We can help firms capitalise on major organisational changes rather than just surviving them.