There’s plenty of appetite among investors to consider the next generation of PE managers, some of whom are spinning out of existing shops with bags of experience but little chance of making partner because of a lack of succession planning.
This new wave of talent faces a significant challenge, naturally, when competing with multi-year, multi-billion dollar PE groups, but provided they put a solid team together, and perhaps test the market with a few co-investment deals to demonstrate their skill (outside of their previous role), there is no reason why new management groups can’t succeed.
Part of the success of this will be to think laterally in terms of the composition of the team. As one prominent US private equity manager recently told Private Equity Wire:
“As investors evaluate PE firms, I think they will want to see generational balance. We have people in their 70s, in their 60s, 50s all the through to their 20s. Established firms typically have this generational balance. If you’re a firm and no one in your team was around during the last financial crisis, that tells you something.”
The undisclosed source goes on to say that in his view, there is appetite for “fresh-faced fund managers but I think they would be well served by surrounding themselves with some grey hair; particularly at this point in the economic cycle”.
For new PE managers, bringing a sagacious veteran into the team, who has lived through various economic cycles and survived to tell the tale, could be a smart consideration; even if this is only in a part-time or advisory capacity.
One only has to look at the world of elite sport to see the benefits it can bring.
In the competitive cut and thrust of American Football, the appointment of Sean McVay as Head Coach of the LA Rams in 2017 at the grand age of 30 made him the youngest ever appointment to the game.
It was a huge risk, granted. But in the last two seasons, the Rams have enjoyed a tremendous run of form, with the fresh-faced maverick McVay reversing the team’s fortunes and leading the Rams to the Superbowl this February; only to fall short at the final hurdle to the New England Patriots.
Part of the key to McVay’s success was melding his creative offensive play calling with the defensive skill of veteran coach, Wade Phillips. At 71, Phillips has four decades of experience that McVay has tapped in to, to great effect.
The wider point to this is that no matter how smart a first-time PE manager thinks they are, there’s no substitute for experience. Investors want assurances in the current climate that PE funds have the skill to buy companies, operate them when markets go south, and sell them at a 3X earnings multiple, for example, in a bear market.
They shouldn’t only be judged on buying and selling companies in a straight up bull market.
Bringing experience into the team would give first-time managers the chance to test investment ideas and get valuable advice on value creation strategies. Too often in the hedge fund world, for example, first-time managers believe their own hype, they raise a good amount of assets, only to fail; either because their strategy didn’t pass muster, or they lacked the business acumen to run their own management company.
“LPs are looking for teams that have weathered the storm at least once,” comments Warren Hibbert, Managing Partner of London-based Asante Capital Group, an independent private equity placement and advisory group.
He makes the point that first-time managers don’t necessarily need to bring ‘grey haired’ veterans into the investment team, per se, but they should include people “who have successfully created value for investors at their prior shop in the same identified strategy”.
Asked whether he thinks investors are more likely to look favourably upon such managers, when it comes to making potential allocations, or whether he thinks other key factors also play a role, Hibbert remarks:
“The key factors include consistency and performance of track record, time spent working together in the past as a team, depth of experience in the strategy they are deploying for their new fund, and how much the manager is planning to invest in the fund.”
