Shakeups at Carlyle, Apollo Underscore Need for Succession Planning
Leadership shakeups at two of the largest private equity firms in the past two years surprised the industry and renewed the importance of succession plans for firms, especially at tumultuous times both economically and geopolitically, say market watchers.
Differing reasons led to the untimely exits of Kewsong Lee, CEO of The Carlyle Group, and Leon Black, cofounder and CEO of Apollo Global Management, so sources say their departures are less about the state of the industry itself and more about individual firms’ needs for smooth transitions. Those transitions are often from personality-driven cofounders to a second generation of leaders.
“In general … succession planning is probably one of the most important things any asset management enterprise needs to do, and it’s one that I think most asset management enterprises spend zero time thinking about,” says Benjamin Phillips, head of asset management global advisory services at Broadridge Financial Solutions, speaking about the broad private equity landscape rather than about Carlyle and Apollo specifically.
Whenever there is a publicly visible succession, new leaders have to juggle how to keep intact the culture and intangible aspects that attract and retain talent, but also how to think about strategic change, he says.
“Does a succession fundamentally reshape the competitive chessboard? Not necessarily, because I think all firms have to go through it. Does it underscore that preparing for it is probably a really important thing to do? Yes,” he says.
Carlyle’s Lee left in August before completing his expiring five-year contract. News reports say Lee and Carlyle’s board could not agree on a new contract. In 2021, Black left the company following news he paid $158 million to the disgraced financier Jeffrey Epstein. An independent audit found no wrongdoing by Black.
Lee and Black’s moves are part of a trend of top leaders stepping down. In January, David McCormick, former CEO of Bridgewater, named Nir Bar Dea and Mark Bertolini, as co-CEOs; McCormick stepped down to consider running for a Senate seat. Bridgewater has seen frequent turnover in the past decade, with at least three other top leaders at the helm, interspersed between CEO stints by founder Ray Dalio.
Can Smaller Firms Compete?
Shakeups at large firms can alter the competitive landscape, but the current flux may not necessarily give smaller firms a leg up. Jamie Ebersole, founder and CEO at Ebersole Financial, a financial planner that invests in private equity, says he’s less worried about succession plans at big firms than smaller ones.
“Firms like Carlyle, Apollo, Ares, TPG, Blackstone, etc., have professionalized their management structures in order to run massive (publicly-traded) investment operations, and thus they have the management talent and resources in-house, in addition to the investing talent, to continue on with their operations without many hiccups,” he says.
Ebersole is more concerned about smaller private-equity firms that likely haven’t started or announced transition plans, especially if they don’t have a deep leadership bench.
A firm’s size is less of an issue for limited partners allocating money than if the firm itself is public or private, says Faraz Shooshani, managing director, senior private markets consultant at Verus, speaking broadly about the private equity landscape. Public buyout firms have to please not just limited partners, but also shareholders, adding a layer of complexity and perhaps limiting returns.
“LPs generally have had to get comfortable with companies going public and behaving more like asset-management entities,” he says.
If limited partners allocate money to public companies, then they may question if individuals that departed were key to delivering strong returns, he adds.
Having a good brand can help with transitions, Broadridge’s Phillips says, as a strong brand can mitigate the risk of transitions if people are attracted by the institution as a whole. A firm with a strong brand can mitigate the risk of a poorly managed succession because the firm’s reputation as a place that acquires and retains talent goes beyond the influence of a single person.
“I think most [investors] have now started to take a broader look across the enterprises they deal with (as) they realize ‘we can’t just rely on individual people here,’” he says.
Ebersole concurs, saying he doesn’t expect leadership changes at Carlyle and Apollo to affect daily operations there, “although it may slow current fundraising efforts until the firms have been able to explain the changes to investors (and) markets.”
Uncertain Economic Outlook
The investment landscape is changing with rising interest rates, a possible U.S. recession, weaker public markets and rising geopolitical tensions, whether it’s the Russian-Ukrainian war or escalating saber-rattling between the U.S. and China.
Shooshani says there may be more scrutiny of publicly traded private equity firms in the current investment landscape. “Generally, when the markets are up, a rising tide raises all boats and issues may get masked. Generally, in down markets … everyone becomes more focused on their investments and the merits of those investments,” he says.
Conventional wisdom suggests when markets get rough, successions increase as leaders may have had enough, but Phillips says he’s not seeing that now. In fact, he says, he’s seeing more leaders wanting to remain and navigate their firms through the changes in the private equity industry itself. Technology is affecting the industry, client demands are evolving, and the market is different, so there are several challenges happening at once.
“Rather than tapping out, many CEOs are saying ‘No, I want to navigate this. This is where I see myself. This is the leadership that I’ve been preparing to add value through.’ And that’s been an interesting dynamic,” Phillips says.
As attractive as these challenges may be, the leadership changes at the biggest firms may spur more founder-CEOs to realize that leadership succession planning is something strategic if they want their companies to last beyond them, rather than viewing it as just another job posting for human resources to fill.
“If you put [economic challenges and succession planning] together, I think that will contribute to the industry being really thoughtful about how to pull these things off,” he says.