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Next generation taking root with money managers

Succession plans reveal how execs are planning for future of their firms

TorreyCove’s David Fann: ‘Most LPs want to invest in institutions that are built to last, not a vehicle that may go away after one more fund.’

Generational change at the big alternative investment firms is finally starting to happen, giving investors more clarity into which executives have been tapped to drive future returns and, in some cases, which executives are likely to strike out on their own.

Several factors are behind the announcements, including investors asking their general partners for succession information to gain more visibility into the firm's — and their investments' — prospects.

Limited partners "do want to see more transparency from the GPs so they can make better investing decisions," said Hugh Shields, a co-founder and principal in the Chicago office of executive coaching and consulting firm Shields Meneley Partners. "While they used to be more passive investors, the LPs are now inserting themselves into the business details more actively so they have a better ... (grasp) on the viability of the business."

After years of firm executives talking about their deep benches of investment talent, The Carlyle Group LP and KKR & Co. Inc. last year named new top executives, setting up succession plans at both firms.

At Carlyle Group, Glenn Youngkin and Kewsong Lee became ​ co-CEOs Jan. 1; and Peter J. Clare was named co-chief investment officer alongside current CIO William E. Conway Jr. Former Chairman Daniel A. D'Aniello is now chairman emeritus and former co-CEOs David M. Rubenstein and William E. Conway, Jr. are now co-executive chairmen of the board.

In July, KKR named Joseph Bae and Scott Nuttall to the new positions of co-presidents and co-COOs. Henry Kravis and George Roberts remain co-chairmen and co-CEOs.

On Jan. 18, Lovell Minnick Partners announced leadership changes that expanded ownership of the middle-market private equity firm. President Steve Pierson and Robert Belke, a partner, were named managing partners with responsibility over the firm's day-to-day operation. Co-founders and co-chairmen Jeffrey Lovell and James Minnick, along with Mr. Pierson, had been overseeing the firm's day-to-day operations before the change.

Industry sources expect more alternative investment firms to name the next generation of executives, especially as they prepare to raise new funds.

Some firms are in the midst of planning, while others have established informal lines of succession, noted Bill Stoffel, U.S. private equity leader in the New York office of Ernst & Young LLP.

Ares Management LP and Apollo Global Management LLC announced leadership changes last year, but sources denied the changes were related to succession plans.

"It's a natural step in our evolution as a firm. We and others in our business are making changes to our management structures to keep pace with the changes in our business," said Michael J Arougheti, Ares co-founder and president who on Jan. 1 took on the additional role of CEO. The former CEO — co-founder and Chairman Tony Ressler — is now executive chairman.

"Tony became executive chairman … to focus more on certain parts of the business. ... Some of our largest, more strategic investors have turned into large allocators of capital, and these investors are reducing the number of GP relationships and he's focused on continuing to build durable strategic relationships across multiple asset classes," Mr. Arougheti said.

Apollo spokesman Charles Zehren declined to comment.

Investors and firm executives are starting to see the succession lines, which might lead to other changes, Mr. Stoffel said. "People tend to leave when they don't get the top job."

At the time KKR announced the promotions of Messrs. Bae and Nuttall, the firm also said Alexander Navab, then head of North American private equity, would be retiring. Mr. Navab had just finished raising one of the largest North American buyout funds ever, with $14 billion in total commitments. In October, he said in an interview with Bloomberg that he plans to start a new private equity firm.

The trend of general partners starting to establish lines of succession is being spurred, in part, by investors tired of waiting for founders to begin relinquishing control.

The private equity industry really began to take root more than 30 years ago, and founders now are nearing retirement age, said David Fann, New York-based president and CEO of private equity consulting firm TorreyCove Capital Partners LLC. "Most LPs want to invest in institutions that are built to last, not a vehicle that may go away after one more fund," Mr. Fann said.

Limited partners are very interested in whether their general partners have set up a line of succession, agreed Lovell Minnick's Mr. Lovell, who is based in Los Angeles. "LPs are looking closely at ... the stability of the management teams of various GPs," Mr. Lovell said, noting "we had discussions with our LPs" about the leadership changes.

"LMP took steps missed by other firms that are not proactive and not planning ahead," Mr. Lovell said. "Taking these steps is a sign of the continuity that exists at the firm."

The existence of a succession plan is an important factor that investors consider when deciding whether to commit to a firm's next fund, noted TorreyCove's Mr. Fann.

"LPs are looking for reasons to say no, and succession can be a part of the investment decision calculus," Mr. Fann said. "They vote with their wallets, and capital continues to flow to those general partners that have smoothly transitioned leadership."

Giving investors clarity on the next generation of investment executives is important for firms looking to raise new funds, Mr. Shields agreed, adding that he expects more firms to announce leadership changes and succession plans.

"In what is now a very competitive environment of fundraising, the GPs are under more pressure to demonstrate more transparency in their operations — and succession is a part of that, particularly for the larger PE firms," Mr. Shields said.

Not all alternative investment firms are being pushed by investors into creating succession plans. Carlyle Group's move was spurred by the desires of Messrs. Rubenstein and Conway to step away from the day-to-day running of the firm and the presence of younger executives who could take their places, a Carlyle spokesman said.

Investors have applauded Carlyle's handling of the succession question, the spokesman said.

For investors, it is all about returns and whether the "culture and ethos" that created historical returns will endure under new leadership, said David MacKinnon, Boston-based partner at Ernst & Young's Transaction Advisory Services in a paper on private equity themes for 2018.