Cover Story

Human Capital

Investing in future leaders has become a priority for maturing PE firms

Private equity is still a relatively young industry, with many firms being founded just 30 to 40 years ago. At many of these firms, it's the founders who are still leading day-to-day operations. That's great for continuity, but what about the future? As the industry matures, more founders are focusing on the future and developing strategies to keep their firms thriving long after they retire. Many firms are coaching the next generation of partners through formal processes and programs. (Watch the video at the end of the feature.)

Watermill Group, founded in 1978 by managing partner Steve Karol and his father, is a classic example of a lower middle-market firm that realized it was time to groom the next generation of leaders. With most of the Lexington, Mass. firm's partners reaching the age of 60, Watermill implemented a leadership training program for mid-level professionals. The results have been positive.

One case in point: Emily Lord, 32, joined Watermill after finishing business school at Babson College in 2010. Lord started as Ben Procter's junior focusing on deal origination and worked side-by-side with the Watermill partner for two years. Yet, Lord's position at the firm isn't unique. Each of the six Watermill partners, who have specialized expertise, teams up with a younger counterpart, who shadows the senior partner to develop the skills necessary to become independently effective in the partner's particular discipline.

"Senior management truly wants us to take a leadership role and they have allowed us to work autonomously," Lord says. "As we are learning, they basically let us run with anything while they provide support and feedback. If we want to start a new initiative or if we want to push forward a certain deal, they back us up."

As part of the learning experience, Procter has introduced Lord to many of his deal contacts, including lenders, bankers and other private equity professionals. After learning the ropes and following Procter's lead for years, Lord is now director of deal origination managing those relationships on behalf of the firm. Lord is also the firm's main representative at many conferences and events, such as the Association Corporate Growth's many Capital Connection events. Lord is also responsible for the firm's marketing plans.

Today, Procter still oversees Lord, but he focuses more of his energy on firm management and transactions. "Each of us has a certain core skill set. I have been doing sourcing and deal origination for a long time. We try to match our skill set with individuals on the team and pass down the knowledge and wisdom so we can work on other things as well," says Procter.

What's more, all the firm's members participate in the investment committee meetings-from the managing partner to interns. The goal of the investment committee is not just to evaluate potential investments but to challenge the team's overall thinking and to benefit from diverse perspectives, says Procter, who adds that the partners benefit from hearing the younger staff members' ideas.

In addition to training the younger staff on specific jobs, the firm holds biweekly training sessions over lunch. Each session covers a dealmaking or management topic that builds breadth of knowledge among members of the firm. At one of the more recent lunch-and-learns, Mike Fuller, a principal at Watermill, hosted a talk about how to do a 13-week cash flow analysis.

Learning the Ropes

Watermill isn't the only firm to focus on talent development. Boston-based Riverside Partners has also worked hard to make sure it has a team in place to carry the firm into the future. David Belluck, a general partner at the firm, joined 25 years ago and took over as head of the firm from its founder, Paul Craig, in 2002. Craig had decided he wanted to retire and do other things with his life. The firm went through a rocky period during and after the transition, creating a tenuous future. The team was uncertain if it would even be able to raise another fund.

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Danielle Fugazy