In late September, a letter arrived at our offices. The head of a UK mid-market buyout firm wrote to announce his retirement. After 25 years in the industry, and seven “fantastic” ones at the helm of his team, he felt it was time to box up his lucky deal cufflinks (our choice of phrase, not his). There was golf to practice and fitness to build, all those good things. And with many friends and colleagues already on the beach, the prospect of joining them was tempting.
The letter had us wondering about a possible subtext. If you're a fifty-something private equity professional at the top of your game, is now a good time to call it quits?
Depending on your frame of mind, you might argue the timing looks perfect. Perhaps here is someone who has taken a long, hard look at the industry's prospects and decided that things are unlikely to get any better.
Why? To start with, private equity has enjoyed an outstanding run these past few years. Competition is as fierce as it has ever been, with more capital widely anticipated to push into the asset class in the coming years. (A senior figure in a leading fund placement advisory team recently told me of his belief that in five year's time, private equity firms globally will likely be capable of raising a trillion dollars per year – which is great news for fundraisers, but it also prompts the question of where all that cash is going to go.)
What's more, regulators appear to be eyeing the industry with growing suspicion – witness for example the investigation of the US Department of Justice into whether buyout firms may have violated anti-trust law (see p. 22).
And if, as many predict, the buyout business really is about to go past an inflection point, would it not be wise to avoid the pain that may lie ahead?
The question is all the more pertinent for senior people at firms that are about to raise new funds. In this case, the difference between staying on and pulling out is measured in many years. If you decide to stay now, you will have a relatively clear idea of what you will be doing in 2015. Is that what you want? Do you (still) want it enough?
Financially, early retirement shouldn't be a problem anyway, not after a successful stint in an industry with a compensation model to die for. And if you've done your homework as a manager, the firm should be ok as well: there are some very able bodies in your team who probably have had their eyes on your job for some time. This is the moment they've been waiting for. Let them scramble for the corner office as you step into the elevator.
Of course, we know that things do not typically work like this in private equity. First of all, we must be mad, you'll say, to be calling the top of the market. We're not, though. All we're saying is, you can see how a senior industry figure today might come to decide against a commitment to stay on for another decade.
More importantly, however, deal-making is highly addictive, and managing partners are usually people in whom this habit is fairly serious. Work for them may no longer be about personal wealth creation, but that doesn't make the hunt any less exciting. This is why succession is so difficult in private equity. This is why deal guys, like heads of state, are in danger of getting the timing of their exit wrong. It's a fascinating predicament and will preoccupy the industry for years to come, especially now that more firms have matured into multi-facetted, multioffice institutions.
One thing is certain: we haven't received many letters like the one that arrived this week. More may yet come, but apparently most private equity practitioners feel there is only so much golf you can play.
So if you are thinking of bowing out, make sure you have other stuff to do. “I will be pretty busy sorting out my various property interests,” wrote our Londonbased GP. Tom Hicks, who quit two years ago, was looking forward to spending more time with the baseball team he owned. Sounds like fun, although a baseball team may be just another of those things that have two perfect days: the day you buy it and the day you sell it.
The good news is, there probably is a safety net. If all else fails, you can go back to doing deals – ideally with some of your own and plenty of other people's money.