Succession in Private Equity
Succession is one of the hardest things that any corporation has to plan for. This is true across every field of business and these challenges are becoming particularly apparent in the investing world.
It is generally difficult finding a high-quality leader who understands the company’s culture, knows how to grow the business, and has earned the trust of the management. Each year, 10-15% of corporations need to appoint a new CEO due to retirement, resignation, or health. However, it is estimated that only 54% of boards have groomed a specific successor, with 39% having no viable internal candidates.
The result oftentimes is extremely messy internal politics and dramatic power grabs. Successful investment firms plan for succession over several years. Recently, some prestigious investment firms have had their succession become hugely public affairs.
In this post, we’ll cover a couple of high-profile succession plans in private equity and take note of some key takeaways.
Succession at Top Private Equity Firms
KKR is the investment firm credited with starting modern private equity and the leveraged buyout strategy now employed by all traditional firms. Two of their original founders, Henry Kravis and George Roberts, remained involved in business operations until their late 70s.
In 2021, KKR announced that Kravis and Roberts would step down as co-CEOs. They were replaced by Joe Bae (left) and Scott Nuttall (right), who both joined KKR in 1996. Bae and Nuttall were nearly 50 at the time, much younger than the leadership at other top private equity firms. However, the two were originally named as co-presidents back in 2017, which makes the case for a multi-year progression to the top spots.
By all outward appearances, KKR’s succession seems to have been handled responsibly. This succession makes the case for promoting long-time employees and having a multi-year transition period.
Carlyle is another private equity megafund and is one of the largest asset managers in the world. Carlyle began its transition of senior leadership in 2017, naming Glenn Youngkin (left) and Kewsong Lee (right) as co-CEOs in 2017. Lee had worked at rival private equity firm Warburg Pincus for 21 years, whereas Youngkin spent 25 years at Carlyle in total. The timing and appointment of the two leaders mirrored that of KKR. In 2020, Glenn Youngkin left Carlyle to launch a successful campaign to be the governor of Virginia. Kewsong Lee assumed the primary leadership role in 2020.
However, in August 2022, Kewsong Lee abruptly stepped down before the end of his 5-year contract. A Reuters report suggested that the original Carlyle co-founders thought that Lee was antagonizing partners by reorganizing the firm's corporate structure. There were also reports of a dispute over compensation, with Lee being denied a $300mm compensation package.
This series of events has left Carlyle facing an unclear future, with both of their chosen successors now out of the picture.
Perhaps the most dramatic succession hand-off of private equity firms was that of Apollo’s. Apollo is one of the most successful private equity firms of the past few decades and its private equity unit has expertise in opportunistic investing.
Leon Black (left), one of Apollo’s co-founders, had been heavily linked to disgraced financier Jeffrey Epstein. The increased scrutiny of their connection led Black to step down as CEO. Josh Harris (right), another of Apollo's co-founders, had long been considered the front-runner to be CEO, but instead stepped down in 2022 following a power struggle with Black. Marc Rowan (middle), also co-founder, would instead take the top spot.
Blackstone is the world’s largest private equity and investment firm. Stephen Schwarzman (right), the firm’s founder, acts as CEO to this day. The firm has been trying to produce a drama-free hand-off to Jonathan Gray (left), who currently serves as President and COO. Gray was formerly the head of Blackstone’s real estate arm and received the promotion to President and COO in 2018. Schwarzman is still involved in Blackstone’s operations, but Gray is publicly recognized as the apparent heir to the business.
A few takeaways to conclude:
It may be too early to declare any of these successions as truly successful. The fallout between Kewsong Lee and Carlyle shows that even for those given the top spot in name, there are often enough measures available for incumbent partners to remove them.
Most private equity firms seem to choose leaders that have grown with the firm over decades. This is applicable to all of the leaders here with the exception of Kewsong Lee (who joined Caryle from Warburg Pincus). Anecdotally from other firms I have worked at (Silver Lake, Providence), this appears to be the norm as well.
If you come for the king, you best not miss. The highly spectacled Apollo succession suggests that Harris may have overplayed his hand when making a move for Apollo. Although Black had to step away from the reins on paper, it was clear he still had extreme influence over choosing the leadership team and was able to remove Harris.