Succession planning has, in general, proved to be a pretty thorny issue for the private equity industry. But one of the few (apparent) exceptions has been London-based Apax Partners: when founder Sir Ronald Cohen surrendered day-to-day control of the firm in 2004, the partners instituted a formal succession process whereby they would elect one of their number as chief executive for a three-year period. Martin Halusa got the nod to replace Cohen; he’s since been re-elected twice more. However, although he plans to stand for re-election again, this will (theoretically) be his last stint – because unusually, Apax has a compulsory retirement age of 60.
But worrying about who will be in charge in a few years’ time is by no means Apax’s only problem at the moment. The London-based firm is currently raising its eighth buyout fund – at a time when some international LPs need a lot of convincing that Europe is still a sensible place to invest. Apax has been expanding its footprint in recent years, and its new fund will, for the first time, be global rather than European in its focus. But the firm still has to battle a perception in some quarters that it’s predominantly a European operation.
What’s more, Apax has recently found itself at the centre of some negative media coverage, both about the level of high-level churn – Private Equity International reported in May that over 30 partners had left the firm since its previous fund closed in 2006 – and its recent performance, with LP sources suggesting that Fund VII may not do as well as previous vintages. Inevitably, this has been linked to its LPs’ recent request (confirmed by the firm) for Halusa to stay on until the end of the new fund’s investment period – i.e. past his 60th birthday.
On paper, the firm’s solution to the succession planning issue seems pragmatic and progressive. But does this suggest investors are not so confident? And even if they are, does the recent turnover point to deficiencies in its talent management practices more generally?
PEI caught up with Halusa in London in early June. Alongside him were four of the partners considered front-runners to succeed him when he does go (as put forward by Apax): Andrew Sillitoe, co-head of the tech and telecom team and a member of the executive committee; Christian Stahl, co-head of the media group and also on the executive committee; Nico Hansen, who chairs both the approval and portfolio review committees; and (appearing via video link from New York) Mitch Truwit, co-head of the financial and business services group.
As you’d expect, all five insisted recent coverage about high turnover did not paint an accurate picture of the state of the firm. And they have one powerful argument in their favour: the new fund, Apax VIII, has just held a €4.3 billion first close, nearly halfway towards its €9 billion target.
“I think the first close of Apax VIII was a great validation,” says Sillitoe. “We have very sophisticated investors who have done a lot of due diligence on our firm over the past few months –and many of them told us that [the coverage] just doesn’t gel with the work they’ve done, or the way they perceive the firm.”
So why all the churn? (Partners who have left the firm in the last five or six years include Stephen Grabiner, former global head of media investments, Alex Fortescue, former head of retail; Max Burger-Calderon, the ex-chairman of Apax Asia in 2009; Adrian Beecroft, its former chief investment officer; Neil Thomson, a member of the portfolio review committee; Matthew Brockman, who led investments in the healthcare, media and consumer sectors; Adele Oliva, who was also on the healthcare team; Jacqueline Reses, who worked on media investments; Stephen Green, former head of the global financial and business services team; and operating partner David Whitehouse.)
“We’ve been increasing the quality of the team,” insists Sillitoe. “Over the past five or six years two processes have been happening: the end of our investment in venture, and the merger of Apax US and buyout firm Saunders Karp & Megrue (SKM). Both of these have resulted in a number of partners leaving. Now, it would be wrong to say that we’ll stop having partner attrition. Part of our approach to human capital management – and it’s an approach we believe works – is to be proactive, to ensure we have the best people investing the funds’ capital. Inevitably that will lead to changes in the team over time.”
“But over the last five years, we’ve lost on average about three partners a year, which is slightly less than 10 percent. That’s a level we’re pretty comfortable with. And the overall investment team size has remained constant. I think LPs would say that we have moved the firm furthest in terms of the processes we have in place for assessing people, and the rigour with which we sometimes take tough decisions.”
So does that mean Apax manages performance more aggressively than other firms? “I’m not sure if ‘aggressively’ is the right word…” Halusa demurs. “We don’t have the data. But I would be surprised if apart from those two things – venture and SKM – our turnover in the last couple of years has actually been any higher than our major competitors.”
Of course, some people argue that there’s not enough churn in private equity. Does Apax subscribe to that view? Sillitoe’s answer suggests a politician’s instinct. “It’s not about the right or wrong level of churn. The key for us is to ensure there’s a path to the top for the highest performers within the firm. The danger for any PE firm is that you have a sense that there isn’t that room for people to grow.”
According to Sillitoe, talent management is something that Apax “really does spend a lot of time thinking about” – which means both attracting the right people, before and after business school (an increasing proportion of new hires are now recruited before business school and sponsored through their studies) and developing careers thereafter, helped by a continuous and rigorous assessment process.
As far as Halusa is concerned, this approach is not a weakness; quite the opposite, in fact. “We think – and investors are starting to agree – that this is one of Apax’s greatest strengths. The discipline with which we apply these career management processes is one of the most sophisticated in the industry.”
Some LPs certainly buy into this approach. One Apax investor told PEI: “They have a very unique culture, where they basically fire 10 percent of their people every year. Their view is: we want to make sure there is always room for the junior guys to move up and get carry. If you have a bunch of guys in the seats by virtue of historic success who’re worrying about their Swiss chalets, that’s demotivating for the younger guys.”
In fact, Hansen argues that making Apax more of a meritocracy – or, as he puts it: “rebasing human capital development on facts and performance and track record” – should go down as Halusa’s biggest achievement as CEO. “That has led to a huge improvement in the average quality of the investment professionals at Apax,” he insists. “I wouldn’t get hired anymore!”