Five Questions with Peter Gilman, partner, Simpson Thacher & Bartlett

  • Minority-stake sales trigger succession planning: Gilman
  • Presents opportunity for GPs to align next generation of leadership
  • Valuations of GPs leading to acceleration in succession planning

1. What role do succession plans play in retaining talent?

From the team’s perspective and from the perspective of the investment professionals at the firm, it shows them there is a path toward continued viability of the franchise and that they’re thinking long term.

Part and parcel with that is a stepping down of the [firm] founder’s economics, so the [rest of the] team is appropriately incentivized to seek to maximize value.

A number of spinouts have been driven by the changes in the regulatory landscape. Changes in secondary businesses — which were previously part of investment banks — [moved on] to other financial sponsors.

But it’s absolutely true [that] spinouts also occur as a result of an inability to put in place a succession plan that continues the long-term viability of the firm. Meeting the needs of the founder, on one hand, and the team on the other.

2. When do you suggest firms start establishing their succession plans?

I think in many cases it’s a function of where they are in the cycle of fundraising, of where they are in the cycle of the evolution of their firm. In many ways, succession planning is informed by the culture.

In a place where you have a committee-based approach — if there’s a founder but the decision is made by committee, and the founder is the head of that committee — in many ways the succession planning in [a situation like that] is already provided. There’s a logical framework there. If the founder were to no longer be actively be involved, the committee would just step in and operate.

[That, as opposed to] a paradigm where you have a founder who makes decisions by fiat. There isn’t that logical next governance mechanism in place to allow for the evolution of the firm.

The single-dominant-founder approach is transitioning into these sort of team-based, committee-based approaches, where it’s a team working together to maximize value versus everyone riding on the coattails of one or two guys.

3. What role do minority investments have in today’s succession plan?

Minority investments are often a catalyst for having an open and candid discussion about the future of the firm. The discussion around succession planning, the discussion around transitioning governance and economics, it’s a very sensitive discussion. Having an event [like] a minority investor making an investment in the firm brings people together in a way where it’s not an adversarial process.

From the perspective of the third-party buyer … the continued health and viability and the planning of the firm is important to their value, which is derived largely from future economic streams. So if there’s not a proper transition plan, that’s called into question.

4. Is the minority-stake-sale market overheating? Some LPs are worried firms might be selling stakes for less-than-noble reasons.

I think those concerns are well placed. I think it does depend on the nature and purpose of the minority stake transaction.

The reasons I would view it as a positive as an LP [are] it provides working capital for the firm to either make additional commitments to its funds, to expand into new products or diversify its asset base.

Tying back to succession planning, [it] provides for a transaction that — while proceeds will flow to the founders of the business — those proceeds are often with a view toward reducing a founder’s stake in the firm. This is done to further incentivize the rest of the team, who might take a greater portion of the carry in future funds.

5. Are more firms taking notice of these deals and exploring taking on minority investors?

It’s a very compelling proposition and I do think it is something that, even if people haven’t previously thought about it, they’re thinking about it now. I think that logically leads toward an acceleration in succession planning. I don’t think you can do one without the other. You can’t do a minority stake sale without a well-thought out, agreed-upon succession plan among the team.

Photo of Peter Gilman provided by Simpson Thacher & Bartlett.