INTELLECTUAL PROPERTY: The sweet smell of succession

At the end of January, Cornerstone Real Estate Advisers, the Hartford, Connecticut-based real estate investment platform of Massachusetts Mutual Life Insurance, named Scott Brown as its new president. Brown, who previously served as head of Americas at CBRE Global Multi Manager, is taking over the role from David Reilly, who will remain at Cornerstone as chief executive officer.

While it may seem that the news was nothing more than a high-profile hire, Reilly’s statement about the appointment was more telling. “After careful consideration and an extensive succession planning process, Cornerstone is delighted to have attracted a candidate of the caliber and experience of Scott to help us continue our growth, both domestically and globally,” he said. 

And Cornerstone isn’t alone. One week earlier, Lone Star Funds promoted André Collin to the newly created role of president, where he will be responsible for the firm’s global operations. As a result of the new post, the Dallas-based firm will be expanding its investment committee, as well as the key-man provision in its partnership agreement, to include Collin.

Although it declined to confirm whether succession planning was at the heart of introducing the new role, Lone Star has come under scrutiny lately with regard to the lack of an apparent successor for founder John Grayken. Indeed, one of its most loyal investors, the Oregon Public Employees’ Retirement Fund, indicated as much at a board meeting last May.

“I want to have a succession strategy in place,” said Oregon State Treasurer Ted Wheeler at the board meeting. “That’s important to me.” 

Even the Wall Street Journal recently made a point to highlight succession planning in the industry. The paper pointed to The Blackstone Group – which has global real estate head Jonathan Gray in line to succeed president Hamilton ‘Tony’ James and, ultimately, Stephen Schwarzman himself – as an example of a good approach to the issue of succession.

For most firms founded in the late 1990s or later, however, the topic of succession planning only recently has moved to the forefront of CEO and LP agendas alike. With many of the founders of these firms currently in their late 50s and early 60s, the question becomes who will run their investment empires in the years ahead.

LPs are not blind to a firm’s succession needs. Whether it is a founder’s impending retirement or the departure of a key portfolio manager, leadership changes can create systemic risk. The inability to find stability through the transition can be a firm’s death knell – triggering redemptions and/or severely limiting the success of subsequent fundraises.

Some founders and senior managers maintain that they have not had the time or inclination to think about succession planning at their firm, while others focus more narrowly on replacement planning, which consists simply of finding and preparing backup candidates for specific senior management positions. Some believe that the next generation of employees will continue to run the business regardless of whether this is consistent with their individual career goals or needs, and still others argue that, in spite of their advancing ages, they are not going anywhere. As a result, there still are a number of firms with a fair amount of work to do in this area, particularly some of the more entrepreneurial firms led by strong personalities. 

Whatever their reasoning, these leaders should realize that succession planning is important for showing investors that their general partnerships are durable and adaptable entities worthy of long-term relationships. For sure, robust succession planning is one box ticked in being a strong fiduciary. In fact, a GP arguably could breach its fiduciary duty of care, a significant component of which is the obligation to act in the best interests of the fund, should it not have a succession plan in place. The inability to maintain stability through an orderly transition of leadership can even precipitate a firm’s demise, triggering redemptions and/or severely limiting the success of subsequent fundraisings.

Speaking of fundraising, succession plans often are tested in due diligence reviews by prospective investors. Key-man provisions in the fund agreement are designed to impose a procedure that will protect the fund and its investors should the named person cease to be actively involved in the fund. It is a pre-ordained process for succession that comprises just one component of the GP’s overall succession plan. Having a key-person provision by itself, however, should not be viewed as sufficient – even at a minimal level – to satisfy the GP’s duty of care to the fund.

Investors nowadays are spending more time reviewing the robustness and durability of the firms managing their money, and succession planning is a key component of that review. While some investors are voting with their wallets, most LPs probably do not have enough influence to advance their desire for better succession planning. Perhaps Oregon’s influence on Lone Star is more the exception than the rule. Nonetheless, it is up to the GP to think of its future and do the right thing.