Friday Letter: Sharing Ownership

Write a quick history of private equity and one defining characteristic will be the transformation of the companies who have grown with the industry: in other words, the fund managers and advisory groups themselves.  

As the asset class has bloomed, so many have changed from being small outfits with a handful of staff to large entities with many personnel. And in so doing the ownership of these firms has become much more significant an issue; for those who are owners – and those who are not. 

Pacific Corporate Group (PCG) is a La Jolla, California private equity advisory firm that does not offer equity ownership in the management company to any of its professionals. Instead, PCG is owned in its entirety by founder Christopher Bower.

Over the past three months, the firm has lost seven managing directors, including the respected president of its asset management business. Founding partners, take note.

Two days ago, the news surfaced that PCG managing directors David Scopelliti and Tom Keck had left the firm. The two had been working at PCG for four months and 16 months, respectively. Both sat on the four-person investment committee.

The central theme to PCG’s personnel turnover seems to be one that is fundamental to private equity as a whole: the successful alignment of economic interests. Stated more plainly: when an owner won’t share, colleagues will become restive. For a start, if an owner won’t share a portion of the equity of the firm with the professionals who have helped increase its value there can be conflict. And if the owner won’t sufficiently share strategic decision making with other senior professionals at the firm there can be trouble also.

PCG recently split into two entities – an asset management arm run by its president, Monte Brem, and a smaller direct investment arm managed by Bower. According to an ex-PCG source, the two divisions were meant to allow Brem greater leadership of the fund investment business. But Brem and three other managing directors resigned in September.

Of course, all protagonists will have their own agendas and perspectives, especially when money and power are involved. A separate source pointed out to PEO that it is only natural for a business owner to take a keen interest in all aspects of the business that he built. Some would say an abrogation of control is just as cardinal a sin as the monopolisation of it.

Nevertheless, some PCG clients are worried. The firm has already lost a mandate from state pension of Washington. Oregon has issued an RFP for a new consultant. An official with the New York State Common Retirement Fund was recently quoted as saying he was “concerned and monitoring the situation”. This was before the departure of Scopelliti and Keck.

A spokesperson for PCG said of the recent turnover: “The departure of [Scopelliti and Keck] is not expected to have any significant effect on the firm’s business.”

On the topic of equity sharing, the spokesperson said that PCG is “reviewing its approach to compensation”.

It’s not as though people at PCG are paid peanuts. Nor is good performance left unrewarded. One ex-PCG source says Bower established a “phantom equity” compensation system to allow senior partners to share in the success of the firm. But phantom equity doesn’t mean anything when, for example, a management company is acquired or listed. And employees never forget that the guy who owns the firm still controls the phantoms.