… John Cockburn, Consultant at PER sums up the sentiments of the panel
Taking centre stage at the Real Deals Mid-Market PE event for the second panel session of the day were Jeremy Hand of Lyceum Capital, Hamish Mair of BMO Global Asset Management and Andrew Hartley; alongside Gail McManus, Managing Director of PER.
The topic: “Animal Farm – when some partners are more equal than others: Best practice in incentivisation, retention and succession”.
Chaired by Nicholas Neveling of Real Deals, the discussion involved a lively conversation on the trials and tribulations faced by founding partners when planning succession within their funds, and how the carried interest system can be an excellent incentive for some people, but also a handcuff for others.
The consensus amongst the panel around succession was that larger fund managers who have branched out from a traditional PE fund-based structure find it much easier to manage succession. This is a model that stems from the US and hasn’t been adopted yet by the majority of funds in Europe.
For those traditional partnerships, where founding partners have gone through a lot of pain in the beginning setting up funds for the first time, it can be harder to let go and hand over the gain which comes afterwards. It was agreed the best way to achieve a smooth transition is to plan far ahead, in the same way that succession within portfolio companies is planned before exiting.
This is never easy, but can be aided when there is a natural progression, for example when there is a spread of age and experience amongst the partners.
When it comes to retention and incentivisation the major focus was on carried interest, although the split of management fees also cropped up as a question from the audience.
Gail pointed out that it doesn’t benefit anyone when people are in the wrong job. This is where carry can be a restrictive factor, tying people into roles where nobody is happy. A slight chuckle could be heard when the idea of a “transfer window” was raised, although more than one person could be seen contemplating it thoughtfully…
The difference of opinion between LPs and GPs on carry was noticeable, and sparks almost started to fly when the conversation moved onto the comparison of the benefits of deal-by-deal allocation and traditional end-of-fund distribution.
Peace was reached with the introduction of new ideas. One suggestion to keep GPs happy with early returns for their efforts but also to placate LPs (who don’t want to watch managers whose funds implode after early success escape with carry they don’t deserve) was to introduce funds of shorter lifespans. The objection to this of course is the need for more regular fundraising.
As attractive as carried interest appears to be, Andrew pointed out that since PE began in the 80’s, over 50% of funds have not achieved carry. Therefore there can be a lot of angst over distribution of carry during, and prior to, the fund’s lifetime which could very well be pointless in the long run.
The over-arching theme for the whole panel was that in order to achieve success in incentivisation, retention and succession there has to be open and frank dialogue between everyone involved. Whether that be when allocating carried interest, dispersing management fees or indeed arranging a plan for who takes over and when, the best approach is one that involves the same depth of forethought and planning used when successfully investing in businesses.
About the author: John Cockburn joined PER after nine years as an officer in the British Army. He now works on placing people into investment, IR and origination roles across the middle market.