While many founders of alternative investment managers (“founders”) choose to wind down their businesses over time, there are a growing number who instead seek to pass the baton to the next generation of investment management talent. their company (the “successor”). For this latter group of founders, succession planning requires careful consideration of many factors. Below are some key steps associated with founder succession planning:
- Step #1: Choose a successor. Often, the first step to undertake is to determine who will be the successor(s) of the founder. It will take a lot of introspection on the founder’s part to find someone who has the talent, culture and gravity to step into his shoes. Sometimes the successor(s) will come from inside the organization, while in other cases they will come from outside the company. Regardless of where the successor comes from, once the founder has decided to start the succession process, the company will be better off if they can select the successor sooner.
- Step 2: Make an agreement with the successor. From the moment the founder identifies the successor until he takes the reins, it can take several years. As such, the founder will need to ensure that the successor is incentivized to wait patiently in the wings. Part of this process will involve discussions on the remuneration of the founder and the successor before and after the succession.1, the evolution of the tasks of the successor throughout the process, and the evolution of the role and remuneration of the founder. This can be a complex negotiation and will need to consider issues such as taxes, conflicts of interest, business valuation and the future direction of the organization. Due to the sensitive nature of the negotiation process, this step should be kept highly confidential and will normally only involve members of the founder’s circle of trust. Ultimately, the negotiated deal will also result in significant revisions to management company, fund and regulatory documentation.
- Step #3: Raise the profile of the successor. The timing of the announcement of a successor is a very delicate process. Often the founder will first seek to raise the profile of the successor within the company and with key investors and counterparties so that these groups become more comfortable with the individual. Feedback from these stakeholders will likely have a significant impact on the chances of success of the succession plan. If there are positive feedback, the founder will usually reveal the succession plan slowly. In many cases, a public relations firm with expertise in these matters will be hired to advise the founder and the firm.
- Step #4: Choose the succession date. Assuming steps 1-3 have gone well, the founder, successor, and other key people will determine when the actual transition can take place. It can be a fixed date or a flexible target date. The date chosen may be affected by events impacting the portfolio, the stability of the company’s personnel and the investor base, as well as the current tax and regulatory environment. In some cases, the founder will remain in an advisory capacity, in special functions or in other bespoke capacities.
- Step #5A: Operational Considerations. As the succession date approaches, the founder and successor will want to be in frequent contact with company personnel, investors and other important third parties to address any final concerns and define short-term, medium-term initiatives. and long-term successor program. Although this outreach is usually done over the phone due to the sensitive nature of the topic, due to selective disclosure issues, it is best to develop a list of talking points to ensure everyone receives the same information.
- Step #5B: Regulatory and contractual considerations. Changing the direction of a business will involve many regulations and contractual arrangements. From a regulatory point of view, the change of ownership can be considered as a change of control requiring the consent of the customer and possibly the investor. In this regard, many filings will need to be changed, including Form ADV and blue sky filings. In addition, regulators, boards of directors and customers may be required by law to approve the transaction. From a contractual perspective, a change in leadership could result in, among other things, the triggering of key person clauses in fund governing documents, side letters and seed contracts. Additionally, it could impact the terms of contracts with third parties such as counterparty agreements and office leases, and may cause auditors and other service providers to perform up-to-date due diligence on the company. Finally, marketing materials will need to be revised to reflect the new direction and review the company’s past performance and how it will be presented in the future.
Founder succession planning is a complex process that aims to provide long-term benefits to alternative investment companies, their staff and investors. However, in order to implement such a change, the Founder must carefully weigh many issues that will impact the success of such an endeavor.
1 Among the issues to be discussed as part of the overall compensation include: (1) whether the founder will be redeemed in full or retain any outstanding interests, (2) if the founder retains any outstanding interests, those interests in each of the compensation incentive, management fees and equity of the business, (3) does this interest die out over time as the successor interest increases, (4) is the interest subject to dilution and (5) is interest awarded based on ongoing contributions to the business by the parties.