On the minds of GPs: succession fears

Private equity professionals have grown increasingly concerned about whether their firm is prepared for a succession event, according to research from Investec.

Nearly one-third of professionals anticipate a succession-led key person event at their firm in the next five years, according to the bank’s GP Trends 2018-19 report, which surveyed 289 professionals. Some 42 percent of respondents do not feel their business has an adequate succession plan in place – a 6 percentage point increase from last year.

The fears are not restricted to junior-level employees: 28 percent of managing partners or equivalent levels said they share the same concern.

Firms including Partners Group, Hellman & Friedman and Blackstone’s Strategic Partners have all had succession events in the past 12 months.

Investec also found that GPs expect to commit an average of 2.9 percent to their next fund, with the average GP commitment at $55 million. This has risen from around 1 percent pre-crisis, Simon Hamilton, global head of Investec Fund Finance, told sister publication Private Equity International.

“Carry is fantastic when things go well but questions were asked by LPs and senior partners about how to retain staff through cycles,” he said.

With fund sizes growing, professionals may be more likely to struggle to meet their GP commitment: 13 percent do not know how they will finance these personal commitments, 5 percentage points higher than 12 months ago. This rises to 23 percent for those below partner-level.

Personnel may be required to reinvest their carry to meet their GP commitments. This has the potential to create conflicts of interest.

“If senior partners have a significant proportion of the team using carry to fund their GP commitment, what happens if we see another 2008?” Hamilton added. “The team might consider accelerating divestment opportunities to fund the commitment, which could be seen as a moral hazard.”

Brookfield Asset Management is committing more than 30 percent to its latest private equity fund, according to 25 January investment committee meeting documents from the New Jersey Division of Investment. The fund is targeting between $8.5 billion and $9 billion.