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REEM Summit: Tackling succession plans at smaller firms

Smaller firms face a host of issues that can make succession planning more difficult than at larger firms.

Succession planning is built into most corporate DNA, with large firms often required by investors or shareholders to have strategies in place for the next generation of leadership.

At less-established shops, though, the question of to whom the torch is passed can be difficult when there are few people in line, compared with deep benches of leadership at large firms. General partners and limited partners alike discussed the tricky nature of next-generation continuity at the biannual Real Estate Emerging Managers Summit, a two-day conference in Austin, Texas last week that brought together investors and emerging managers from across the country.

Limited partners often take succession plans under consideration when evaluating a firm, giving an advantage to those who strategize well. The investors said they must consider the business risk to their investments if an executive – or, in the case of some emerging managers, the only executive – leaves the firm. Real estate can be particularly challenging because some investments might outlast a fund’s horizon, with lingering deals that need leadership continuity. One limited partner warned attendees that when a firm failed to disclose its ownership structure and succession plan, the limited partner did not recommit.

However, managers can present their smaller bench of potential successors as an advantage over bigger players. At larger firms, power struggles and significant turnover among senior management can lead to chaos, which is less likely at small firms, where the founders may groom a specific person for succession.

And one executive with an advisory firm said that smaller firms seem to use their succession plans, rather than simply compiling them for investors’ sake and failing to execute if necessary. One GP told PERE that his firm has planned for the worst, even though the executive is in his 40s and has no plans to leave anytime soon.

“We know exactly what happens if I get hit by a bus,” he said.