If private credit is a people business and relationships portend future success, then succession planning must weigh heavily on the minds of chief executives and their senior management kin.
This has been a watershed year for leaders of large publicly traded alternative asset managers, including those with substantive credit platforms, as they pave the way for a smooth transition when their leaders head for the exit.
“We typically underwrite not only the firm and strategy but also their people. In general, most firms in the alternative space are now becoming more mature,” says Thierry Adant, a credit research consultant at Willis Towers Watson, arguing that the industry has reached a point where succession has become a more prominent issue.
To recap, KKR paved the way for its next generation of leadership when it named Joe Bae and Scott Nuttall as co-presidents and co-chief operating officers. Henry Kravis and George Roberts will remain co-chairmen and co-CEOs.
At The Carlyle Group, co-CEOs William Conway and David Rubenstein went one step further, relinquishing the top job to Glenn Youngkin and Kewsong Lee. Conway and Rubenstein will become co-executive chairmen.
Scott Kleinman: Apollo Global Management
Previously: Lead partner, private equity
Jim Zelter: Apollo Global Management
Previously: Managing partner and chief investment office, credit
GSO Capital Partners also expanded its leadership team by bringing Dwight Scott in as president of Blackstone’s credit arm, expanding his portfolio of duties beyond its energy debt business. Co-founders Bennett Goodman and Tripp Smith will continue to oversee the business.
In addition, Apollo Global Management broadened its executive leadership team by naming Scott Kleinman and Jim Zelter as co-presidents, while Leon Black will remain CEO. Though an expansion of the leadership team, the promotions were “not so much about succession” as the evolution of the firm, a source close to the business told PDI.
While all of the above maintain private debt platforms, succession has been a more prominent issue in private equity. It may seem like splitting hairs when it comes to succession planning, but there are differences that make credit managers unique, including the way debt funds are structured and the mix of investment products.
Retention carries benefits
Compensation plays into personnel retention, and the retention of senior management is something investors look at very carefully.
“Clearly, the biggest asset that any asset manager has is client retention because that’s where the value is,” says George Mazin, a partner in law firm Dechert’s financial services and investment management practice. “The question is going to be, if there is a material succession, will there be a flight of investors? What are they tied to? Is it the founders or the broader firm?”
Carried interest is a prominent aspect of compensation, with realisation of profit only coming at the end of a fund, meaning the longer the fund, the longer before a general partner receives a payout.
Private credit funds often have six- to eight-year lives, plus the standard option of two one-year extensions, while private equity funds often last a decade or more. As a result, investment professionals at credit firms will likely realise their portion of any carried interest much sooner than senior and mid-level employees at private equity shops.
“[Succession] timing becomes more important in private debt,” says Adant. “In private equity, it might take much longer for them to vest. Given the velocity of the funds is faster in debt, private equity has been able to retain talent longer.”
Kewsong Lee: The Carlyle Group
Previously: Deputy chief investment officer, corporate private equity; Head of global market strategies
Now: Co-chief executive officer
Glenn Youngkin: The Carlyle Group
Previously: President and chief operating officer
Now: Co-chief executive officer
This is particularly true at firms that pay incentive fees via the European-type waterfall – where investors are reimbursed with their principal and preferred return before the GP sees its portion of those profits – rather than the American waterfall, which is paid on a deal-by-deal basis. As a trade-off, carry for private equity funds can be higher, often around 20 percent compared with the 15 percent private credit firms often charge.
Departures of senior personnel can also catch the eyes of investors and potentially influence decisions.
In one such instance, the Alaska Retirement Management Board at a March meeting observed that the impending departure of Erik Falk from KKR – who at the time was the firm’s global head of private credit and co-head of the direct lending strategy and is now at Magnetar Capital – was a “negative development”.
A consultant to the Juneau, Alaska-based pension fund said it would “monitor this as part of their due diligence” for KKR Lending Partners III, the New York-based alternative asset behemoth’s latest direct lending vehicle. ARMB, which invested in Fund II, is yet to make a decision on Fund III.
Credit the relationships
Another important aspect is firm culture, Adant explains. “One of the most proven ways to keep the organisation performing strongly is by having a good culture,” he says. “It helps in productivity and retention.”
Differences in fund structure are not limited to fund lengths and carry fees. Credit vehicles can use leverage facilities, sometimes to a multiple of up to three times. That adds an extra alliance the firm must preserve.
“The one thing that is perhaps different for debt funds is that many debt funds are leveraged,” Mazin says, “and in addition to sourcing deals it’s important for debt funds to maintain relationships with lending partners they have.”
Healthcare investment firm CRG, which closed Fund III on its hard-cap of $1.25 billion in January, began arranging its succession plan years ago, a roadmap that included details for carried interest in Funds IV and V, PDI reported in April. Founder Charles Tate’s income will receive a portion of the profits from those two vehicles, in addition to a share of the firm’s performance over a five-year time-frame.
Joe Bae: KKR
Previously: Managing partner, KKR Asia; global head of infrastructure and energy real assets
Now: Co-president, co-chief operating officer
Scott Nuttall: KKR
Previously: Head of global capital and asset management group
Now: Co-president, co-chief operating officer
CRG says Nate Hukill, the current president who will fill Tate’s shoes once he steps down, was involved in arranging the leverage facility for Fund III. Hukill remains on good terms with those providing the facility, a spokesman says.
Those relationships unique to debt firms go beyond lenders providing a leverage facility at the fund level, Mazin adds. It also includes relationships with other debt firms that – though they may vie against each other for deals – have to remain on amicable terms because they often club together to close deals.
Private credit firms have a more diverse mix of products than orthodox buyout firms, Mazin says. Credit managers have private funds for different types of debt, asset-based lending groups, business development companies, plus CLO and loan syndication desks to name a few. BDCs utilise leverage facilities as well and CLOs have warehouse lines, adding even more counterparties for the firm to stay on good terms with.
“Private equity funds have become more diversified, but it’s not as simple as it used to be because they’ve seen different cycles and they’ve realised they need to evolve,” Mazin says.
To that end, many private equity firms have added private credit operations, including this year BC Partners and Thoma Bravo. Seemingly fewer credit firms have gone the other way by adding private equity to the mix.
As private equity firms continue to add private credit operations, it adds one more level of consideration to succession planning. Senior executives likely have solid relationships with their firm’s limited partners, but developing and maintaining the types of relationship unique to credit firms is another aspect important to succession planning.
In good hands
Governance structures have evolved as the alternative asset classes come of age and sometimes are altered through the succession planning process.
“Firms are developing larger governance teams to take them to the next stage,” Willis Towers Watson’s Adant says. This can involve a bifurcation of duties. For example, the CEO’s duties could shift to less involvement in capital raising, allowing that person to be more focused on the firm’s strategic planning.
Dwight Scott: GSO Capital Partners
Previously: Led GSO energy investments
Now: Senior managing director, president
Twin Brook Capital Partners co-founder Chris Williams says when he and fellow co-founder Trevor Clark speak to potential investors, the limited partners ensure the topic of succession is something that has not escaped the two men’s attention.
“I think it’s a natural question and part of most limited partners’ standard list of diligence questions. They want to know you have thought about it, and do you have a detailed plan?” Williams said. “What they want to understand is what is the depth of the team behind Trevor and me. What’s the bench strength behind the top two guys?”
Twin Brook’s parent firm, Angelo Gordon, drew up a succession plan in September 2016 following co-founder John Angelo’s death in January that year. It included the creation of a four-person management committee. Through 2021, Angelo Gordon’s senior employees will acquire the controlling equity interests from co-founder Michael Gordon and Angelo, and invest a substantial amount of capital.
At CRG, Tate created a five-person Founders’ Group as part of the succession plan, consisting of senior executives.
Private credit as an asset class is far behind private equity in its development. Some 83 percent of institutional investors in a survey by investment consultant Callan this year say they created their private equity allocation prior to the global financial crisis, whereas many LPs are just adding private credit to their fixed-income or private equity allocations.
Though private debt might be younger, this doesn’t negate the importance of succession planning for private credit firms. On the contrary, preparation could assuage any investor concern and be a boon to the fortunes of the asset class.