Despite private equity’s (PE) very well-established position as an engine of the global economy, even the oldest firms have only been around a few decades. And for many of them, the founders are still in charge. But as the old guard approaches retirement, it’s time to hand over the reins.
Our latest report on the future state of PE, How can private equity transform into positive equity?, found that succession planning within this environment requires a balance in retaining culture and dynamism while simultaneously addressing new business realities — such as the need to close the emerging digital skills gap.
Passing the leadership baton
“The PE industry is still very personalized, and not very institutionalized,” said David Bonderman, Chairman and Founding Partner, TPG, in our report. “Most of the big businesses are still run by their founders. There will need to be a generational change over time.” Some PE firms have traditionally operated as an extension of their founders’ personalities, with business and investor relationships intimately tied to those individuals.
How can these firms persist without their founding leaders setting the vision? Being able to bring on the most diverse and dynamic talent will be critical for PE firms — but these newcomers will also need to understand and reflect the companies’ overriding purpose and culture to ensure continuity and maintain trust.
One major talent challenge will be getting compensation right. “We saw that there was an enormous amount of inequality within the groups,” said Harvard Business School Professor Josh Lerner in our report. “Typically, for larger firms, the founder got at least twice as much carry as the average senior partner.”
This leads to instability and high turnover. “Groups with more inequality tend to be less stable,” Lerner explained. “Partners with good track records but a lower share tended, not surprisingly, to be footloose. Losing senior partners ultimately hindered these groups’ ability to raise additional funds relative to their peers.”
Creating compensation systems that not only reward top performers, but do so equitably, will be key to attracting and retaining the next generation of top talent.
Disrupted business models
Additionally, at a time when the next generation of PE leaders is being identified, it is increasingly important that firms begin to seek not only diverse but specialized talent — particularly around technology. Many of our report participants insisted that addressing this skills gap was crucial for PE firms to survive in the future.
"If you were to point to an area of financial services ripe for disruption, you could say this one,” says David Rubenstein, Co-Founder and Co-CEO, The Carlyle Group, in our report. “We are using essentially the same business model we’ve used for 40 to 50 years."