Adequately preparing for the next generation of leaders is an issue facing the private equity industry the world over. The lack of a credible succession plan can delay or totally derail a fundraising process.
In Australia, the challenge is brought into particularly sharp focus. Relatively young compared with other developed markets, the Australian private equity market is not that deep and there is just a handful of well-established, high quality fund managers.
Almost every person PEI has spoken to in the last year regarding challenges facing the private equity industry in Australia has mentioned succession planning. One domestic investor said he could not see much evidence of clear and sensible succession planning at any of the firms, and in an interview for our upcoming 2016 Australia Report, Future Fund’s Steve Byrom remarked that the issue was leading the fund to be “cautious”.
“It’s something that the private equity industry generally does not do very well,” he said.
As several members of the Australian private equity community have pointed out to PEI, negotiating a successful leadership transition is something fund managers do day in, day out at their portfolio companies. In theory, if there’s one industry that ought to be adept at tackling this particular issue, private equity should be it.
But, whether it’s founding partners’ unwillingness to let go of the reins or a lack of sufficient talent in the second tier, that doesn’t appear to be the case.
Some Australian firms have negotiated the transition well. In February 2014 CHAMP Private Equity founders Bill Ferris and Joe Skrzynski handed over the day to day running of the firm to John Haddock, appointing him CEO and CIO. The pair remain at the firm as co-founding partners and co-chairmen of CHAMP’s board of directors and investment committee.
Mid-market firm Quadrant Private Equity has also taken steps to secure its future, appointing former managing director Chris Hadley as executive chairman in 2015 and promoting Marcus Darville and Justin Ryan to managing partner.
Others have not managed the situation so adeptly. The latest casualty is CHAMP Ventures, CHAMP Private Equity’s sister fund which operates independently. This month PEI learned that the firm has scrapped plans to raise a new fund and decided to wind down in the face of insurmountable issues concerning succession.
There’s no denying that transitioning to new leadership is challenging. But it also offers an opportunity for regeneration.
As well as bringing fresh blood and energy into the higher echelons of well-established firms, it can also be the catalyst for spin-outs. While Archer is still working through a transition, Archer Growth, its lower mid-market affiliate, has spun out as The Growth Fund, and is raising a A$400 million ($288 million; €257 million) vehicle, according to local media reports.
Likewise, Jason Cachia, having spent more than seven years with Quadrant, struck out on his own last year to launch Evolve Private Capital to invest in businesses with revenues of up to A$50 million.
In such an unpredictable business as private equity, the adage that nothing is certain except death and taxes holds true. It should go without saying that firm founders cannot remain in their roles for ever. It is those that face up to this, and adequately prepare the next generation of leaders, who will ultimately preserve their firms – and their legacies – for posterity.
Look out for PEI’s 2016 Australia Report, which will be published alongside our upcoming June issue.