Legacy issues: GP succession planning

Ashish Dhawan remains a curious case in Asian private equity: the founder who departed his firm and left the franchise intact. It was a well-planned process. Dhawan is said to have raised the issue with his team at India-focused ChrysCapital about 24 months before his intended exit. Six months after that, LPs were informed that leadership of the firm would transition to six experienced managing directors.

Dhawan officially left in July 2012, taking on a senior advisor role as his involvement scaled back. Four years on, two of those six managing directors have moved on, but ChrysCapital remains very much in business. The GP is on course to hit the hard cap of $650 million for its seventh fund, having reached a first close of $350 million after about three months in the market.

Orderly succession planning is a challenge few other private equity firms native to the region have addressed. AVCJ is not yet 30 years old and most GPs in the region have less than two decades of history behind them. Firms have come and gone, but they tend not to outlast the founders. It is, however, a reality that an increasing number of established private equity players will have to face, and it remains to be seen how many are sufficiently prepared.

CHAMP Private Equity was the first high-profile case in Australia, with co-founders Bill Ferris and Joe Skrzynski, who set up the firm in 1987, handing over day-to-day management to CEO John Haddock. More recently, Quadrant Private Equity stalwart Chris Hadley took on the role of executive chairman as Marcus Darville and Justin Ryan assumed managing partner responsibilities. And CHAMP Ventures has postponed the launch of its eighth fund, a move that has been linked to succession issues.

At its heart, succession planning is all about team building - a private equity firm becomes a franchise when it has a deep bench of talent beneath the founder. This talent must also, over the course of its apprenticeship, spend quality time with LPs. A successful transition is invariably capped by a successful fundraise, with a new key man clause, and this hangs on existing investors buying into the plan: they need to understand the process and be comfortable that the new leadership can execute the strategy.

With this in mind, LP due diligence routinely focuses on deal attribution and team stability. They want to know which investment professionals participated in particular transactions, and whether these individuals are properly incentivized. It is all very well backing a GP because the founder has outstanding deal-sourcing pedigree, but LPs want firms they can support across multiple vintages, and a single rainmaker doesn't convey sustainability.

Career development is an important factor in employee retention. In a private equity context, this usually means greater involvement and responsibility in the investment process - and there have been plenty of spin-outs in Asia driven by frustration at the lack of autonomy allowed by an investment committee on another continent. Money is another factor, particularly the division of GP economics among the more senior members of a team.

The significance of compensation is underlined by Josh Lerner, a professor at Harvard Business School, on economics within the private equity partnership. His recently published study of just under 300 GPs and 6,344 investment professionals managing 717 funds identifies three patterns: allocation of fund economics has more to do with whether the individual is a founder rather than their past performance as an investor; inequality in the division of carried interest and GP ownership is likely to lead to senior-level departures; and these departures have a negative impact on firms' ability to raise new funds.

Anecdotal evidence suggests that at more than a few groups in Asia, a significant share of the economics accrue to one or more founders. Given the cult of personality that surrounds some GPs, this is not surprising. An argument might be made that without this key individual there would be no firm and no economics to share at all. It is short-sighted. Even if the founder has no interest in building a franchise that outlasts him, LPs are looking for team stability that extends beyond the life of the current fund.

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• Topics
• GPs
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• LPs
• Asia
• Appointments