In private equity and debt firms, when a leadership exit occurs, it is most often a hectic transition, and could even result in other employees or key partners leaving the firm as well.
Limited Partners are sensitive to the negative impact a poorly planned succession plan can have on their investment, and almost always request details on the plan and demographic details about the founding and senior partners during their due diligence.1
Private Equity firms can take several actions to ensure there are new leaders ready to step up should a key person leave. Every company must develop leaders that will be able to extend the relationships with a variety of stakeholders: investors, leadership teams of portfolio companies, as well as the firm’s internal team.
1. Company Culture: Make employees Aware of the Company’s Mission and Values
Throughout the year, management should remind employees of the firm’s mission and values. If these are prominent and constantly emphasized, bad apples will tend to fall off the tree naturally.2
Encourage low ego, high emotional intelligence, and effective communication. These qualities foster honest communication. When you communicate your succession plan with staff, partners, and investors there are no surprises when a departure occurs.3
Ensure that competition among different parties within the company, is healthy. A mature private equity firm should be able to align forces internally, with multiple teams working on different ventures. If everyone has the same vision and values, working together should not create rivalry.2
2. Take a Chance on the Next Generation
It is imperative to take a chance and trust the next generation. Focusing on professional development among these younger employees will make it much easier to promote from within. If the next generation of leaders has a strong understanding of the business, the culture, and the company’s shared values, it will make transitioning to a new leader a smoother process.2
Create trust within the younger generation by giving them more accountability and more time with senior management. A hands-on approach gives them confidence when it is time to transition.
3. Get Comfortable With Letting Go
It is difficult for a leader, especially a founder, to let go of control of the firm. They have worked diligently for many years and it is with trepidation that they turn over their position to a younger, less-experienced team member. This can cause senior employees to remain at the firm beyond their productivity. 3
New leadership and new ways of operating can be beneficial for everyone. If the proper succession planning is in place, the younger generation will be ready to step in and take the lead.
Succession planning is not a pleasant experience for leadership teams but it is a natural progression as the firm grows. It is important to take early steps to prepare the firm for success with a plan of action, especially for private equity firms, where founders often dictate the personality of the firm.