Managing departures

At some point, most firms will have to manage the departure of a partner – and it won't always be on friendly terms. It’s an issue PE Manager has explored in the past, offering guidance on what might happen to a leaving partner’s slice of carried interest, any stake in the management company and co-investment capital. But of course that’s not all that must be considered when a parting of ways becomes necessary…

Friendly fire: When a partner has underperformed or committed some type of misconduct, the firm’s disciplinary procedures (if exercised) should clearly outline when a termination is justifiable, to ensure fairness. But in practice, attempting to resolve the matter quietly may be a better option than formal disciplinary proceedings – if only for cosmetic reasons.

Assigning credit: Sometimes, at the time of departure, partners seek the right to share their track records, particularly if they plan to spearhead or join a new fundraising effort. Be sure to negotiate how their track record can be communicated – or risk the firm’s successes being overly attributed to an exiting employee.

Right to compete: Create targeted and reasonable non-compete clauses (which prohibit the departing partner from competing with his former firm for a specified period of time). Otherwise they can be difficult to enforce in court, private equity lawyers tell PE Manager, adding many firms make the mistake of drafting non-compete clauses that are too broad and restrictive. 

Litigation risk: It’s true that every contract is negotiated differently, but all should exhibit clearly delineated rights and obligations set at the time of a partner’s arrival. If this is done right, coupled with face-to-face meetings when negotiating any settlement documents, it reduces the likelihood of litigation or disputes post-exit.

Protecting your reputation: In this small, relationship-based industry, people talk. And while it may do little harm if rival firms are snickering at the gripes voiced by a disgruntled employee, LP investment committees communicate too – and they may see a mishandled departure as a cause for concern. Likewise, the press is only too happy to lend its ear to an insider source with a story to tell, making it especially critical to handle any exiting employee with care and respect.