It is no surprise that when Blackstone’s chief financial officer Laurence Tosi said he was resigning last week, the news reverberated not only throughout the world of private equity but through the wider finance industry as well. After all, Tosi held a key position for eight years at a company that is the world’s largest private equity firm.
Blackstone was swift to respond, tapping Michael Chae, who has been with the New York-based asset manager since 1997, to succeed Tosi. Aside from needing to replace a key executive, insiders reckon Blackstone also sought someone who would be able to lead the firm when Steve Schwarzman, its co-founder and chief executive, decides to step down.
As giants of the private equity industry reach several decades of age, it is only natural that the topic of succession and succession planning is taken increasingly seriously. More surprising is how little attention these questions get in the world of infrastructure: one source we recently spoke to said that LPs are not giving much thought to how succession issues at GPs with whom they partner can affect their investments.
Granted, this is partly because infrastructure is a relatively new asset class – certainly newer than private equity. But as Meagan Nichols, head of real assets research at investment advisor Cambridge Associates, told us this week, “a lot of private equity firms – both generalist and sector-specific, such as infrastructure, energy – are all going through succession issues if they’ve been around for a while.”
An example is First Reserve, a Connecticut-based private equity firm focused exclusively on the energy sector. Last February, First Reserve appointed Alex Krueger as co-chief executive, in what it called the “next step in the firm’s existing succession plan.” Krueger now shares the chief executive title with William Macaulay, one of the firm’s co-founders and chairman.
Worth noting, however, is that the issue is not bound to arise only at established firms like First Reserve – which launched its first infrastructure fund in 2008 but started operating in 1983 – but also at managers that have just entered the fray but have a very tenured team.
The good news is that LPs have ways to foresee what’s coming – by asking the right questions. Some of them will have to be asked from the outset, when an LP is looking to start a relationship with a GP. The partnership agreement a manager has in place is indeed a good indicator in determining how a key person’s departure will affect the firm’s overall direction and strategy. For example, if the fund manager has established a core team then one person leaving – even if it is a key one – will have a more limited impact.
Other factors to consider, in addition to the partnership agreement, is whether the firm has a succession plan in place and what it involves. Relevant questions here include general enquiries (Is the management team going to raise just one fund and then want to retire? How long are they committed to staying in the sector?) as well as more targeted ones (Is the firm grooming future leaders? Does their mindset align with the firm’s current investment philosophy?).
But that is not all. While these questions can apply to succession issues in general, the complex nature of infrastructure assets warrants exploring succession planning at the asset level.
As the asset class has matured, competition has increased and returns have become compressed, investors are increasingly seeking assets offering room for operational improvement. And more often than not, the management teams in place at the asset level are crucial in marshalling positive changes: the companies that ranked highest in our inaugural Operational Excellence Awards earlier this year were brownfield assets that underwent a significant turnaround.
“In some cases, it’s not so much about the GP and the team at the GP, it’s about the team operating the asset and the succession planning there,” Nichols told us. LPs need not only inquire whether capable executives are heading a company they’re exposed to. They must also make sure that those executives are going to oversee that asset’s business plan over its entire timeline – or that an arrangement exists to replace them with an equally skilled team.
In the investment as in the corporate world, changes at the top can be as daunting as they are exciting. Exploring succession issues early and adequately enough will allow LPs to look forward to potential upsides while limiting downsides within a more predictable ambit.