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.
"After Fund II it was an interesting journey," says Belluck. "In 2002, I took a look at the firm. I felt good about our strategy and approach to deal making and we had a good track record, but at the same time I felt disappointed that we hadn't built a sustainable firm in 15 years and that's really what I wanted."
With the founder retired, Belluck set out to change the direction of the firm to build something larger and long-lasting. The first steps were shrinking the firm down and building it back up with fresh talent. Belluck funded the firm personally during this period. He hired five people, several of whom became the nucleus of the firm. "I give credit to the people who joined the firm at this point. It was 2002, the world was in bad shape, our founder had left and we didn't have a fund," says Belluck, who remembers he was looking for entrepreneurial-type people to join the firm.
Lucky for Belluck he was able to woo Philip Borden to join in 2004. Soon after, the firm set out to raise Fund III. "I was young at the time and I viewed it as an incredible opportunity," says Borden. "The firm had a great track record, but had its troubles. It was risky, but I figured there would be more reward."
"David laid out an attractive path for me if we were all successful, and I wanted to be part of building a firm," he says.
Riverside Partners not only raised Fund III in 2005 with $225 million, but it raised its latest fund, a $561 million Fund V, in 2013 and was over-subscribed. Today, the firm has more than 30 employees today and focuses on healthcare and technology investments.
As part of Belluck's new strategy to build a sustainable firm, he put processes in place to reward talent such as Borden, who is now also a general partner at the firm. Borden started his career at Riverside Partners by doing all non-partner type of work that needs to be done on a deal, but he worked side-by-side Belluck. As time went on and Borden learned the ropes, Belluck started relying more on Borden.
"He gave me more responsibility that allowed me to grow and make my own mistakes as I moved up the ladder. I worked directly with David on deals for four years and then I was promoted. I lead my own deals now," says Borden.
Borden is now co-leading a program at the firm that focuses on mentoring the junior staff.
"After our small initial team was working together for a few years, we realized that we needed to focus more on developing our employees," says Borden. "It was what David has wanted and it helps us attract top talent to want to work with us. We emphasize that now as a selling point of our firm."
The firm's formal program allows younger staff to get involved in all aspects of the dealmaking process, from working on financial models to marketing. The senior team trains the younger professionals in a transparent environment. Additionally, all professionals are involved in Monday meetings, when they talk over every deal and portfolio company the firm is involved in. All professionals are also brought into investment committee meetings and given specific tasks to perform on transactions.
"We wanted it to be a structured program that lets the staff know we have a vested interest in their career. Great talent is the guts of what you need to scale," says Belluck, adding that the firm now has a solid partnership and a strong foundation of people at all levels.
Mentoring Not Just for Juniors
While mentoring programs certainly help the next generation of dealmakers grow up, there are benefits to the senior staff as well. For example, a year ago Watermill's Lord was part of a team comprised of the younger staff that worked together to teach people at the firm the benefits of social media and how to use it. Additionally, the firm's interns did a presentation this past summer on social-media marketing and helped senior partners set up their LinkedIn and Twitter accounts.
"The partners didn't get it," says Lord. "We now tweet about portfolio companies, industry knowledge and Watermill news."
The endeavor paid off. Mergers & Acquisitions recently named Watermill as one of the top PE firms to follow on Twitter.
"It's a branding tool that shows who we are," says Lord. "It may help us attract talent or get us a meeting or even a deal one day. It's important and the partners are now fully behind it."
The partners certainly seem receptive to the new ideas the next generation is bringing to the table as well, says Procter. "Learning goes both ways. We have benefited from the younger team's skills as digital natives. They've established a strong social media and marketing presence for the firm, which has helped us promote our collegial culture," he says.
These strategies help ensure that firms are creating a strong legacy brand that will survive long after the founders leave, but there's also a benefit today. Given the long-term commitments investors typically make to private equity firms, investors like to know their capital is being invested with firms that can withstand almost anything. "Senior management is not going anywhere today, but it's a huge positive for our investors to know we are developing a deeper bench with very capable people on it," says Procter.
LPs Look for Deep Benches
Russell Cassella, a principal in the Customized Fund Investment Group (CFIG) at Credit Suisse Private Equity, says that building a deep team is becoming increasingly important to limited partners who invest in private equity firms, and it is something he and his team look at very carefully when deciding which firms to invest in. The CFIG has roughly $31 billion under management and commits about $1 billion to private equity funds annually through its investment and co-investment program; so a proper vetting process is a must.
"The team is critical. At CFIG, we have 800 fund manager relationships across our portfolio, and when things don't work out it's usually because of issues involving the team, which can lead to increased turnover or a drop-off in performance," says Cassella, who focuses on investing in middle-market private equity firms, emerging managers and co-investment opportunities. "When executing fund investments, we are making long-term commitments, and the team part of the equation has to be right. We want to make sure the right processes and incentives are in place so the firm can retain the next generation of leaders."
Prior to making an investment, Cassella will perform due diligence on PE firms to make sure they have the right resources in place to be successful investors. First, the firm will do a high level analysis around the private equity firm's resources and capacity. "We look at the number of boards people sit on, the size of the deal teams and how many deals they need to execute on to determine if the strategy is feasible with the capacity they have. We also look at their hiring plans for the future," says Cassella.
After Cassella is comfortable with the team's capacity to do deals, he will spend time with everyone on the deal teams from the vice presidents to the senior-level professionals to evaluate the depth and quality of the team.
"We want to know that this team can deliver now and in the future. It's very common for us to hear when we meet with private equity firms that, for example, a certain deal team member in Fund II will lead his own deals in Fund III. It's very much an apprenticeship business," says Cassella. "We expect that and like to see that continuity."