For private-equity firm founders, letting go is hard to do

Some better than others at surrendering control

Private equity founders are not as good at smoothly relinquishing control of their firms as they are at making private equity investments.

Larger firms approach succession planning a bit different than midsized or small alternative investment firms, said Hugh Shields, a co-founder and principal in the Chicago office of executive coaching and consulting firm Shields Meneley Partners.

"The larger firms like the Carlyles … although they don't like to talk about it, they approach it in a little bit more of a formal way," Mr. Shields said.

The needs or life events of the founders of midsized or small firms will eclipse succession planning, he said. Typically, the trigger point is when the firm is about raise a new fund. The question then will arise of how the firm will be split up among the partners and which partners have produced the strongest net income for the firm.

"The discussion is pretty civil; everyone makes their case," but at the end of the day the largest shareholder decides how the firm will be split, Mr. Shields said, .

"In some firms it becomes an arm-wrestling match with sharp elbows," he said. "In a few cases it has broken up the firm."

At other firms, the founder avoids the question and waits too long. Some only act after being forced due to illness or some other circumstance. "This causes a lot of stress on the firm" leading to executive departures, Mr. Shields said.

The private equity business "is incredibly stimulating and for many GPs, it's nearly impossible to leave once it's in your blood," said David Fann, president and CEO of private equity consulting firm TorreyCove Capital Partners LLC, which is based in New York.

"Most recognize that they need to create a road map for the future and support their legacy, but they just can't step away," he added.