Paying for the past

“The heroes of the past have become the villains of today,” says Jon Moulton of Alchemy Partners in response to the wave of chief executives resignations that have characterised much of 2009. And the worst is not over for those who have avoided the exit door as mass write downs continue to overshadow past triumphs, with nervous investors much more interested in succession plans.

For the firms that have already replaced their chief executives, few have followed what you would call traditional succession. Private equity houses have been quick to issue clichéd statements about age, bringing in a new generation and CEOs leaving to pursue other interests, but the reality is that firms are under intense pressure to be seen to be adapting the new market, which often means getting rid of the person who was at the helm when chaos broke out.

Philip Yea of 3i resigned in late 2008, following the revelation that the firm’s top 50 investments had lost £682m (21%) of their value in its third quarter. 3i said that Yea’s successor, Michael Queen, was taking over because of generational issues.

Chairman Baroness Hogg said: “Phil is stepping down to assist the transition to the next generation of leadership.” What many in the industry found entertaining about the excuse was that there is no real generational difference between a 54 year old man being succeeded by a 47 year old one.

Changing Hands

Guy Hands was also an interesting resignation, in that it wasn’t really a resignation. Sources have told EVCJ that although Hands has taken over as chairman and has appointed Tim Pryce as chief executive, he is still running the show. Change had to come at the struggling private equity house following its annual review, when the firm cut the carrying value of EMI by almost half, to about £1.2bn, so in order to keep Hands, but be seen to be adjusting the leadership of the firm, Hands stepped up and was succeeded by his chief legal counsel.

Hands recently spoke about the challenges facing chief executives in the industry: “Sitting back, using financial leverage and flipping companies to another GP or strategic buyer will no longer be an option. Life on the whole will get a lot tougher and a lot less financially rewarding for GPs.”

Hands hit on a very important point about chief executive resignations. The effort that chief executives now have to put into raising a fund or completing an exit is far more than most have experienced in recent years. And while men in their 50s are certainly able to complete their duties as chief executive, many are simply unwilling.

“You will see a lot of voluntary, ‘screw this I’m off for a lark’ from chief execs. They’re thinking ‘I’ve made what I need so I’m off’. There have been a lot of bad mistakes made and the private equity industry is facing a lot of hard work,” says Moulton.

Fear of change

Nervous investors are also playing an important role in the chief executive changes. Historically, investors do not like to be surprised so the changes at the top will have been heavily influenced by the men controlling the purse strings.

Many remember back to 2005 when the partners of Sovereign Capital were too afraid to tell investors that they wanted to get rid of a managing partner only to launch the surprise dismissal of Peter Brooks. “Sovereign is the old way of making changes and it’s clearly falling apart. You have to bring investors close and not do anything rash,” says Louis G. Elson, co-founder and managing partner at Palamon Capital Partners

Although few could argue that investors do not like sudden change, many GPs believe that LPs have become somewhat of a nuisance when it comes to wanting to make changes. “Investors view any kind of change as bad which makes things difficult” says Moulton.

And while some believe the industry’s leaders are simply too tired to face another economic cycle and some think that chief executives are being pushed out to pay for the sins of the past, there are those that simply think these changes reflect a maturation of the industry.

“Difficult times are forcing institutions to make changes especially in leadership. Younger people are joining these firms and want structure and succession plans,” says Elson. Whatever the cause is of these changes, there is little dispute that more changes are yet to come.


Company Predecessor Successor

3i Philip Yea (54) Michael Queen (47)

Palamon Michael Hoffman (62) Louis Elson (45)

Cinven Robin Hall (60) Hugh Langmuir (53)

Terra Firma Guy Hands (50) Tim Pryce

SVG Advisers Andrew Williams (56) Tony Dalwood (38)