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KKR's Succession Plans Mark Private Equity's ‘Inflection Point’

  • Managing transition smoothly is now ‘critical,’ lawyer says
  • Carlyle positions Youngkin but has lost other top candidates

Private equity firms are good at shaking up management at their portfolio companies. When it comes to their own firms, they’ve been slower to make changes at the top.

That’s increasingly changing. KKR & Co., one of the oldest buyout firms, made its succession plans explicit Monday when it promoted two executives in their 40s to co-presidents and co-chief operating officers underneath 73-year-old founders Henry Kravis and George Roberts.

The move creates one of the clearest road maps for transition among publicly traded private equity firms. While Blackstone Group LP has a deep bench of veteran dealmakers under Chief Executive Officer Steve Schwarzman, 70, and President Tony James, it hasn’t elevated any one person’s role yet. It did add two -- real estate head Jon Gray, 47, and credit honcho Bennett Goodman, 60 -- to its board of directors in the past five years, and Schwarzman in 2015 said Gray is “part” of its succession plan.

The firms frequently field questions from their clients, whose money can be locked up in a fund for a decade, about who will still be managing the money in 10 years. Younger dealmakers can also become agitated when they don’t see a path upward, losing motivation or spinning out to start competing funds. As the founders of some of the biggest firms age into their 70s, the succession questions get more pressing.

“This is an inflection point for the industry, and is increasingly an area of focus for investors and regulators in private equity,” said Andrew Wright, a partner at the law firm Kirkland & Ellis LLP. “Ensuring a smooth changing of the guard is critical for these firms’ long-term success.”

Carlyle’s Youngkin

Some large firms have taken interim steps to answer the question. Carlyle Group LP has steadily promoted Glenn Youngkin, 50, to his current role as president, below the alternative-asset manager’s three founders, who range in age from 67 to 70. In 2014, those founders created a program called KEIP -- key executive incentive program -- which uses higher payoffs tied to firm performance to make it attractive for certain executives to remain at Carlyle. Youngkin is the only named participant in the program in the Washington-based firm’s latest annual report.

Carlyle wasn’t able to keep two previous members of the program. Mike Cavanagh spent 11 months at the firm as co-president alongside Youngkin, before joining cable giant Comcast Corp. as chief financial officer in 2015. And Adena Friedman was Carlyle’s CFO from 2011 to 2014 before rejoining Nasdaq Inc., where she’s now CEO.

Other major firms have recently made smooth transitions at the top. TPG, the buyout firm started by David Bonderman and Jim Coulter, moved Bonderman, 74, into the chairman role in 2014 and added former Goldman Sachs Group Inc. executive Jon Winkelried as co-CEO alongside Coulter, 57, the following year.

‘Thoughtful, Proactive’

Bain Capital last year promoted four long-time executives to elevated titles that were a first in the partnership’s history. John Connaughton and Jonathan Lavine became co-managing partners overseeing day-to-day operations of the alternative-asset manager, and Josh Bekenstein and Steve Pagliuca are co-chairmen.

At Apollo Global Management LLC, the three founders range in age from 52 to 65, younger than leaders at their largest peers. Still, the second-biggest U.S.-based private equity firm bolstered its top ranks last year with banker Gary Parr, who was named as co-chairman of the management operating committee.

“Leadership change is one of the most consequential events an organization can experience,” said Bill Stoffel, U.S. private equity leader at EY. “Top of mind for private equity firms is a desire to preserve the culture and values that made the firm successful. The best protection is a thoughtful, proactive succession plan that includes grooming the next generation of talent.”

Global Experience

As the private equity industry has grown and evolved, so has the role of its top executives. Investment prowess has become less a benefit than a prerequisite -- a basic requirement for a candidate who also would need to manage hundreds or thousands of employees in offices across the globe, as well as disparate businesses and shifting industry dynamics.

Scott Nuttall and Joe Bae, who were named Monday as co-presidents and co-COOs at New York-based KKR, both joined the firm in 1996. Bae, 45, moved to Hong Kong in 2005 to spearhead KKR’s expansion into Asia, where it’s raised three dedicated funds with over $19 billion.

Nuttall, 44, helped shepherd the company’s 2010 listing on the New York Stock Exchange and has led its public reporting since then, speaking to shareholders and analysts instead of Kravis or Roberts. He’s also overseen expansion of the credit, capital markets, hedge fund and fundraising groups, and he’s helped develop the investment strategy of KKR’s $14.3 billion balance sheet, the biggest among peers.

“They think and act globally,” Kravis and Roberts said of the duo.

The need to formulate succession plans isn’t necessarily a rush, said Chris Kotowski, an analyst at Oppenheimer & Co. who covers private equity managers and banks. Older executives such as Berkshire Hathaway Inc.’s Warren Buffett, 86, and Charlie Munger, 93, continue to be active and successful, he said as an example.

“They all have very deep benches,” Kotowski said of the large private equity firms. “The founders, in my opinion, can be easily replaced internally at all these companies by any number of qualified successors, but why should they? The companies are more profitable and growing more rapidly than any other financial-services companies that I am aware of.”

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