Leaving the Castle

Why the resignation of Castle Harlan’s ‘heir apparent’ is symptomatic of this stage of the cycle.

The resignation in August of Justin Wender as president of mid-market specialist Castle Harlan came as a big surprise to the private equity industry.

Wender was considered by many to be the ‘heir apparent’ to the firm’s founders, Leonard Harlan and John Castle, and limited partners have told PEI in the past that US-based Castle Harlan was one of the only firms with a coherent succession plan in place.

Nevertheless, Wender’s decision to step down, which he attributed to disagreements over the future of the firm, is normal course for private equity in a slow market, according to placement agent Terence Crikelair at Champlain Advisors.

“The question is, ‘Who raised the last fund? Who is raising the next fund? Is it worth remaining involved as a partner? What is the carry worth?  What’s the [firm’s] franchise value in the long run? Who is the face of the firm?’ In tough times, executives say, ‘my deals are doing fine, your deals are challenged, and it may be time to move to where the grass is greener’,” Crikelair says.

Wender’s resignation came within five months of the firm closing its fifth fund, which had an initial target of $1.5 billion, but ended up collecting $800 million. The firm has made two investments from Fund V, leaving it with $700 million to invest in mid-market companies.

Wender started at Castle Harlan 17 years ago. He was named chief investment officer and senior managing director in 2004 before being appointed president in 2006. He declined to talk about his next vocational move.

“After 17 years at Castle Harlan, I have made the difficult decision that it makes sense for me to move on,” he said in a statement. “I expect to assess and announce my next steps in due course.”

Prior to Castle Harlan, Wender worked for two years in the corporate finance group of Merrill Lynch. He has sat on the boards of Castle Harlan portfolio companies Morton’s Restaurant Group, McCormick & Schmick’s, Ames True Temper and Polypipe Global Holdings, among others.

The story of private equity firms losing their future generation of leaders is fairly common. Sometimes it has to do with a firm’s founders not stepping down; or with wealth – the young partner has already amassed a fortune, and doesn’t want to take on the burden of leading an entire firm, say sources. “They’ve made enough money and want to go do something else,” Crikelair says.

When the carried interest is growing – as it did in the buyout boom – many professionals are happy to take part in the upswing, says Crikelair.  In a downturn however, it’s a different story. Wender’s tale is an example of the hurdles firms and their LPs face in establishing future leadership.