Mark Gallogly, the senior managing partner in charge of Blackstone’s private equity business, left the US firm in the last few weeks to launch his own private equity operation. It is understood that Gallogly will pursue his passion for telecom investments and insiders at the group say that the split was wholly amicable, with partners even lining up to invest their own cash in the new venture. Blackstone has recently had a first close on its US$12bn global private equity fund.
Blackstone is not the only international firm to experience the departure of senior staff. Edward Gilhuly and Scott Stuart, the heirs apparent to the KKR throne, have announced that they are leaving to establish a hedge fund. The two men, who were seen as long-term successors to founders Henry Kravis and George Roberts, will leave at the end of the year to establish a fund focusing on “long-term, value-oriented equity investing”. Gilhuly founded the European arm of the US buyout giant, which is also currently in the process of raising a US$4bn European-focused fund.
In Europe, Robert Savage, a deal-maker at UK-based Doughty Hanson, who led the successful Priory deal, has left the firm. It is unclear what his intentions are, but it is widely rumoured that the firm’s carry pool is held fairly tightly by the founders Nigel Doughty and Richard Hanson.
Permira has also informed its investors that one of its guiding lights of the last decade will leave the fold. Charlie Troup, co-head of the group’s media practice and instrumental on deals such as AA, Holmes Place and Inmarsat, is leaving on amicable terms. “Troup has made a strong contribution to the firm and we wish him well for the future,” said Permira in a statement. Permira has also recently lost Frederik Roth in Germany and Robert van Goethem in the Netherlands to buyout rival 3i.
Perhaps most intriguingly of all, Phil Goodwin – erstwhile head of UK investments at Montagu – is believed to have announced his intention to abandon his quest for Mammon in pursuit of a more spiritual role. Goodwin has decided to step down from his position at the UK-based firm, which has just closed its third fund at €2.2bn, to pursue a part-time masters degree in theology. He is, in fact, beating a fairly well trodden path from “cash to cloth”. Stephen Green, the chief executive of Montagu’s former parent, HSBC, is an ordained priest.
The move has prompted something of a shake-up in Montagu’s senior ranks. Nigel Hammond, former head of European investment at the firm, will become head of UK investments. Goodwin will move to what is described as a strategic support role. Denis Leroy, former head of the French operations, becomes the first non-UK member of the group’s senior management board, stepping into Hammond’s shoes as head of European investment.
A familiar path
These moves are the cyclical life-blood of the buyouts industry. As firms become larger and more institutionalised, ambitious individuals will seek their own paths. Others will decide that their material objectives have been met and that now is the time to pursue more pastoral goals.
Several factors mean that now is a good time to move. Many of the larger firms are in the process of fundraising, a natural time for partners to assess their options. Some will feel disgruntled about being tied into a fund for the next 10 years if they are not happy with the amount of carried interest they have been allocated.
Others may find themselves gently nudged down the retirement path if it is felt that they no longer fit with the objectives of the firm. The subtleties and complexities of dealing with succession issues during the fundraising period are myriad. It is a time when judgements about who is on the way up and who is on the way down are starkly illustrated by the share of carry that they are allotted.
In many cases, the shadow of a firm’s founders may also be too long for more independently minded partners, who would rather shape their own destiny than tow the corporate line.
“Many of the larger European firms have not dealt with succession issues, and some of the founders seem to want to go on for ever,” said Nigel McConnell, managing director of Electra Partners.
Unlike their US peers, most European partnerships have remained true to their private equity roots. Peter Taylor, chief executive of Duke Street, said: “Some people would say that there is a lack of ambition in European groups – this is cultural – do we want to create an institution or do we want a boutique partnership? Culturally, I think that most European guys have had fun working in close partnerships – that is just what makes them tick, and I think that is where they want to stay.”
One strong factor behind the current departures has to be the amount of institutional cash that is available. With many of the larger branded funds oversubscribed, there is clearly capital out there that is looking for a home in the asset class. As the industry matures it is becoming more transparent; LPs are gravitating around a smaller number of blue-chip managers, which are increasingly oversubscribed.
The recent Frank Russell Survey on Alternative Investing found that the percentage of investors committing to private equity had increased in all jurisdictions except the US. As more capital pours into the asset class, many institutions will find that they cannot invest with their first-choice funds and will seek alternative routes to maximise their returns.
At the same time, the limited partner community is also taking a more sophisticated approach to spin-outs, with funds of funds differentiating themselves by their ability to spot the stars of the future. A recent report by research firm AltAssets found that nearly 30% of institutional investors in the asset class have a real interest in supporting next generation funds in Europe. In addition, a significant number of US investors were also keen to support next generation funds in Europe, and a significant number of European investors are keen to invest in next generation fund managers in the US.
Some funds of funds have even launched vehicles that are specifically dedicated to supporting first timers. Databases at the FoFs now track the role of the individual in every deal, so it makes it far easier to assess who are the real stars.
Successful spin-offs have been relatively uncommon of late. It is a couple of years since Richard Campin, Tom Sweet-Escort, Chris Graham and Hugh Richards left 3i to form Exponent. While a first deal is believed to be imminent, the so-called Group of Four have yet to open its innings.
Harald Mix’s Altor Capital Partners has been more successful at finding suitable investments in the Nordic region. One senior source said: “While the incentive model for spin-outs is very compelling, the market access proposition is very difficult. If you have four blokes sat in an office in the [London] West End, they are only going to see the same dross that everyone else sees.”
Electra’s McConnell highlights another problem. “Although there is a lot of capital around at the moment, new funds that get raised at the top of the market tend to produce poor returns,” he said. “Ideally, you would raise the money now and a wait a year for the market to cool off.”
While there are a couple of spin-outs from captive funds slated for early 2006, it remains to be seen if the current restlessness in the private equity world results in any new firms being launched. With such a large over-hang of capital looking for a home, it would not be at all surprising to find ambitious individuals talking to investors and placement agents.
The development of the private equity industry suggests that, during times where there is a strong institutional demand for the product, people feel more bullish about going their own way. The increasing sophistication of limited partners and recent research suggesting that smaller, more entrepreneurial funds outperform their more institutional peers should encourage LPs and GPs alike.