Succession Planning in Private Equity

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While the focus in private equity is on building immediate value for exit, leaders must consider the company’s development after it’s been sold. Investors will want a growth story and succession is integral to that. A solid talent management plan proves the business has the depth and breadth of skills to support it for the long term.

recent poll by Criticaleye found that while ninety per cent of respondents believed that succession planning built a company’s valuation on exit, none were satisfied with their existing framework for succession.

“It can be uncomfortable to have conversations regarding your successor at the best of times, not least in private equity when other business challenges can seem more immediate. Yet succession is a vital part of building value in the business,” says Matthew Blagg, CEO of Criticaleye.

We asked a range of business leaders within private equity to share their thoughts and experiences on succession planning. Here’s what they had to say:

Understand What Makes a Good Succession Plan in PE

Paul Brennan is Chairman of private equity backed cloud software provider, OnApp.

A succession plan is not only good for the business but for its potential buyer – it’s the insurance that underpins the value of the existing team. If an acquirer comes into a business without a succession plan, it’s really only buying the IP.

Some private equity-backed businesses neglect succession because they just don’t see the importance when they are looking to get out in three or four years. Other PE houses focus on it as a way of replacing the CEO, which isn’t succession planning, it’s replacement planning – there is a fine line at times. A good succession plan is one that the person who will leave buys into.

If you have a strong number two in place because they are a co-founder, that is not succession planning. Good planning brings the whole company upstream.

If it’s handled in a way that’s best for the business then succession shouldn’t be contentious. While the decisions should be made by the CEO and board, an experienced HR Director − which you may only get in a larger business − is critical in understanding the nuances and processes.

For example, people may question what will happen to them when they leave – will they lose their stock or options? Having a HRD who can explain remuneration avoids having conversations about packages on the fly, which is not what you want to do.

Decide Whether Succession is Right for Your Business 

Graham Maundrell is HR Director at The Vita Group, which is backed by private equity firm, TPG.

While I was an advocate of succession in my previous roles as HRD at De La Rue and Diageo, I think succession planning can be less relevant in PE, depending on the anticipated holding period.

I started off with a classic succession planning model at Vita but it wasn’t appropriate for us as it didn’t add anything. One of the things with PE is that if it’s not adding value, you shouldn’t waste your time. What was important was developing capabilities, and the way we did that was by getting the right calibre of people at the top of the business.

We’ve retained a lot of our managers so there hasn’t been a lot of churn but, where managers have left, we’ve been able to do a lot of internal promotion [because of] the development we’ve done [with] our people.

Potential buyers always want to go out to sites and hear managers talk about the business. If they get the sense that management knows what they’re talking about, I think that gives buyers much more confidence than if they’re given a colourful presentation on succession. After all, numbers are audited but who audits succession planning? No one really.

Use Succession to Build Value for the Exit

Debbie Hewitt is Chairman at Moss Bros Group and the private equity owned Evander Group.

When you come to exit a PE-backed business, the value of being able to show you have a very credible team but also that there is some succession within that team – is significant. If you have no demonstrable succession plan for critical roles, many potential buyers are likely to see that as a risk to the long-term sustainability of performance across the business. Having succession options is a critical part of building value.

What I’ve often found is that succession planning becomes part of the exit plan but if you wait until six months before the exit, you won’t have a plan. Assess the team early on in your ownership of the business, be clear about the critical roles, understand how you might build the cadre of talent and then implement that.

It’s really important to understand the vital roles in the exit story, and the strength and depth of your team in those roles. For example, is the digital expertise concentrated in just one person, or across a team?

I don’t see succession in private equity businesses as any different from succession in other ownership structures. Arguably, the value from good succession planning in private equity-owned businesses can be more tangible.

Prepare for Your Departure 

Stuart Coventry is Partner at Jamieson, an advisory firm that supports PE firms in succession.

In private equity you have a combination of new owners, liquidity and management time horizons to deal with. Those three things together mean you have to manage succession more vocally than if you had a business that was not changing hands.

If you think about a typical four-year PE hold, you’d need to have succession in place about mid-way through, which is when most people only just start to think about it.

Leaders must prepare for their own departure and that means succession planning.  We sometimes get asked “Do I always have to roll?” I tell them that if they haven’t prepared anyone to replace them they’ll be too important to the deal to leave, which is why they end up rolling again.

Succession is not a dirty word, actually it’s part of ordinary business process and if you do it in an orderly way there is no issue with it. Investors will want that conversation to be had. While it can be a difficult conversation for management to raise, it’s healthy on both sides.

Don’t Stop at the C-Suite

Shaun Middleton is Managing Partner at Dunedin, a UK mid-market PE firm.

Many of the businesses we buy have been run on a shoestring so don’t have a broad enough base for succession. In those cases owners don’t invest in quality people because they are focused on the short term. Investment into building the right team, and one that can progress, will have an immediate hit on your bottom line but pays off in the longer term when you’re growing.

We continually look at succession and that’s not just regarding the leader, it’s about the entire business. If you look at it in that way, CEO succession happens naturally.

The biggest issues we face are when someone leaves a business and you don’t have the tiers below to step up. Having someone internally is far easier than recruiting from outside.

When it comes to exiting, if you have a strong management structure with good people below, it makes the sale easier. If you’re selling a business that relies on one or two leaders, people aren’t going to pay as much for it.

The better the management team, the more willing they will be to put succession plans in place. Some don’t want the threat they perceive a good succession plan may pose. There are myriad reasons why people might be nervous about it, but you need to deal with the human element and persuade people about the value of succession.

Do you have a view on succession in private equity that you would like to share? If so, please email maryanne@criticaleye.com

Read more on succession for the CEO and wider company.

Plus, join the discussion during our Global Conference Call on Succession Planning for the C-Suite

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