Succession Planning Is Critical for Private Equity Firms

Succession Planning for Private Equity Firms is Essential to Long-Term Financial Success

Succession planning is important for any type of business that would like to see the legacy continue after the founding members are gone. Often, private equity firms put a great deal of thought and effort into the succession planning of their operating companies, yet fail to practice what they preach when it comes to their own firm.

Succession planning refers to the process of ensuring that an organization’s operations continue uninterrupted and that its performance doesn’t suffer in the event that one or more leaders depart. A principal’s exit can be planned or unplanned, but either way, the departure can cause tremendous upheaval in the organization. Just as importantly, without proper succession planning, a change of leadership can be a cause of concern for investors and portfolio companies.

Private equity firms suffer the same consequences of poor succession planning as other types of companies. It can lead to a loss of customers, talent turnover, and reduced company performance. 

But the unique nature of private equity relationships introduces additional threats to the company when succession planning isn’t done right or doesn’t happen at all. International leadership development strategist Jenn DeWall shares, “For private equity, this can mean loss of investor trust, leading to fewer investments, instability in relationship management, and gaps in asset management.”

Why is Proper Succession Planning Important for Private Equity Firms?

It’s important for private equity leaders to understand that experienced LPs recognize that poor succession planning can be bad for their returns. Many will want to know about the firm’s succession plan during due diligence. Those private equity firms that can’t provide clear answers that reflect the careful preparation they’ve done are considered riskier investments.

This is because private equity leadership is unique. Your firm needs leaders who understand the intricacies of navigating relationships with a variety of stakeholders, including partners, investors, and leadership teams of portfolio companies, not to mention their own firm’s internal team. 

They also must be able to understand how to continue to maintain a strategic focus on value creation in current investments, while simultaneously developing new opportunities. There are not many people in the industry who have the skill and experience to understand and effectively address these factors, particularly through a period of transition.

When a leadership exit occurs in a private equity firm, there is a significant risk that the transition period will be chaotic. It can often result in key partners and/or employees leaving the organization, as well. It can also create changes in the firm’s strategic focus. These and other negative potential outcomes can impact investors’ returns, even as they are stuck in a long-term contract. 

If the ship isn’t righted quickly, investors begin to feel the burn and will react accordingly. And they should be expected to. Nobody enjoys suffering losses, in particular those that could have been avoided with better succession planning. Not only will the firm find it difficult to retain investors, it will also have a tough time bringing in new ones.

5 Private Equity Succession Planning Best Practices

Simply having a succession plan shouldn’t be any firm’s objective. There is a right way and a wrong way (really, many wrong ways) to do succession planning. In our experience, the five best practices below are essential. 

  1. Start early.

It is never too early to begin succession planning. A great example of this is the story of Blue Point Capital. This mid-sized firm had a succession plan almost from the very beginning, and was able to exercise that plan by their third round of funding.

The earlier you begin your firm’s succession planning, the easier it is to put the rest of these best practices into place. It also gives you ample time to groom your next generation of leaders, helps your firm react to an unplanned exit easily, and improves transparency and communication among investors and the internal team. When you plan for succession early on, it becomes an organic transition rather than a knee-jerk reaction.

  1. Remember that firm culture rules.

A positive firm culture is critical to effective succession planning for several reasons. First, if you’ve developed a sense of ownership and fairness in economic outcomes among your team members, they’re much less likely to react negatively to a leadership transition.

Developing a culture of open, honest communication and full transparency also helps with the transition. It means that you’ve been communicating with staff, partners, and investors openly about your succession plan so that there are no major surprises when it happens.

Further, when your firm has a culture that is focused on the professional development of employees, it becomes much easier to promote from within. This way, you’ll know that the next generation of leaders intimately understands the business, the culture, and the firm’s shared values. Developing your next generation of leaders should include a mix of leadership development training and mentorship programs.

When the time is right and you’ve identified the right people, promoting co-leaders in order to give them hands-on experience and training is very beneficial. As the founding leadership team of many top private equity firms are entering their twilight years, this approach to transitioning to the next generation of leaders is proving quite valuable. Bain Capital and KKR & Co. are two examples of top firms incorporating new co-leadership positions into their succession plans.

  1. Keep a “portfolio” of leadership contenders.

Many private equity firms create a “portfolio” of potential CEO contenders for the companies in which they invest. But this is also a good practice for your firm’s own succession planning. Some firms simply don’t have the resources or the talent pool to be able to promote from within. In that case, you will need to do an outside search for leadership talent.

Maintaining a list of potential next-gen firm leaders helps your leadership team keep an eye on their professional development and achievements over time in order to determine how well a person fits into the firm’s vision of the future. It also helps make the transition less time consuming and costly if there is an unplanned leadership exit.

  1. Develop fair incentive programs.

Including incentive programs for your firm’s next generation of leaders is a must in your succession planning. Too often, new leaders become frustrated and disenfranchised when they take on greater work and responsibilities in the firm without increased compensation, while the founder sits back and continues to take the lion’s share of economic benefit. This often leads to the successors leaving the firm prematurely to start their own firms.

Make sure your next generation of leaders are well compensated and cared for if you want to ensure your firm’s ongoing success. They need to feel a real sense of ownership in the organization, even if they weren’t the original founding members.

  1. Ensure leaders get comfortable with the idea of letting go.

Perhaps the most difficult thing for a founder to do is just let go. It’s risky to hand the reins over to young and less-experienced team members. Founders worry that they’ll watch everything that they’ve worked so hard to build crumble. It’s a legitimate concern, but one that must be pushed aside if you want your succession plan to be a success.

New leaders will likely do some things in a different way and make different decisions than a founder might. But that’s not necessarily a bad thing. It’s vital that current leaders not let their egos stop their firms from continuing on without them.

Succession planning is inherently difficult in any type of organization. For private equity firms, it’s even more so. 

The transition that takes place when a key leader exits a firm can cause a significant amount of stress and financial pain—for the private equity firm as well as investors. But putting a transparent and fair succession plan into action early on, and ensuring it’s one that focuses on the development of your internal team, can smooth the transition and make sure your operations get back on track as quickly as possible.

A traditional crm was built for general ‘customer’ scenarios

Software platforms have made the world a better place by making work a better place. Indeed the world is better off when people enjoy their jobs even marginally more, and workplace applications on big CRM platforms like have done that and much more.

But the potential that platforms like these offer presents diminishing returns: once the platform provider has engineered too many industry specific components into its platform, its usefulness for other industries begins to be threatened, and with that so do the usefulness of the component tools built into the platform.

So it is with the CRM category that has defined: it is generic enough to work for many industries, and yet still offers the potential for others to round off the edges and nail more vertically-oriented and extremely tailored software solutions.

Private capital markets are actually a great demonstration of this dynamic. Where generic CRM platforms simplify — appropriately so — to assume there’s a business, a customer, a sale, and service of that customer, there are a few industry-specific pieces that are missing.

Take for example, that investors become customers by investing through legal entities the GP raises. It’s a subtle but important nuance that just doesn’t make sense at a platform-as-a-service level (because it’s overly complicated for a simple one-time sale that many industries require), but which can easily be added without 10 years or software engineering. Once provided, the rest of the platform’s components become tremendously powerful again and you’re set to take over the world.

As a traditional CRM in our pillars methodology, these nuances must be present to properly account for investors in these legal entities, potential target companies and which are owned by these entities, the context of all interactions with these parties (as well as the appropriate overlap, ie co-investments), and how you’re arriving at finding these opportunities on both sides of the equation, such that you’re able to piece together what’s effective and what’s not. Not just because we say so, but because these are the very relationships and data that are key to the motivation behind a CRM in any industry.

It’s critical, too, that the valuable publicly-available information that helps to enrich CRM systems and save users painful steps of entering it themselves is fully-integrated at the platform level.

Again, look no further than the 3,000+ pre-built integrations that — the creator of the CRM platform concept — has at a platform level to do so, and which only exists by way of holding just short of overly-specifying certain industry workflows that would present challenges to properly integrate.

Stakeholder reporting and communication (investor relations) draws on a range of datasets

The traditional “customer service” model of CRM systems once again makes overly-simplified assumptions about the customer relationship when applied to private capital markets.

In fifteen years I personally have yet to hear the terms “warranty” or “service call” in this market because it’s just not the same. But make no mistake, as uncomfortable as it may be to say aloud, customer service is more important now than ever and it’s constantly happening; the industry is, after all, considered to be a financial “service”.

As it turns out, that service is primarily information-based — it’s driven by data and takes the form of reports and analysis that drive decisions, and then end up again in investor-facing reports and analysis.

The foundational elements of a private capital markets CRM must be built such that they accommodate this data (like we discussed above), but so too that it can accommodate additional supporting data that investors (customers!) need in the context of service.

Oftentimes this supporting data — financial metrics and time-based values, for example — is believed not to meet the traditional definition of CRM and the natural thought is “well, better do this in Excel!”.

While I happen to believe Excel is still the greatest software application ever built, its introduction to this value chain we’ve discussed herein actually creates the problem many firms suffer from: key data needed to provide customer service (again: effectively the entirety of a firm’s reports and analysis) is now in disparate systems and detached.

Both of those dynamics are important and distinct: not only is this supplemental data disparate, but when brought together there is no logical association that can be made between the two data sets.

Allow me, then, to make the point very simply: not only can this financial and time-based value data (you may be thinking about is as “portfolio monitoring” or “accounting”) be a part of a CRM, it is arguably the most important part of a CRM because it’s at the core of what providing service to the customer entails — information that comes out of data!

Firms need a digital method to engage stakeholders (ie investor portals)

Investor portals are not new; in fact, for many of us — including myself — they conjure up horrifying nightmares in which we’re aimlessly guessing at folders to find the newest document we need.

So in lies the opportunity: not only have the portals we’ve come to hate not simplified the process of acquiring information, they’ve failed to create an entirely new experience that is “customer service” driven.

To be fair, this is not a B2C market where you’d be long out of business for not having focused on customer service and thus the customer’s technology-driven experience. But don’t expect to be around too much longer if you aren’t thinking about this shift.

Today’s institutional investors increasingly expect this same consumer-like experience, and a massive opportunity is being missed by not providing it. It’s not about providing them the experience they desire; it’s more about the ability to measure engagement that is had in return.

Put simply: what’s keeping the market from providing this experience is the availability of the information that’s required to create the service that provides the experience.

If you’ve hung in this long, you know that by focusing on your CRM, you have the data that’s required to manage the customer relationship and the technology-driven experience through which that information is shared to create a differentiated and opportunistic customer experience.

investor relations