‘ Young’ bucks buck the trend
Private equity executives strike out on their own
NEW YORK
• A common criticism of the so-called “second generation” of executives in the private equity industry — those sitting directly beneath the handful of financiers who pioneered buyouts in the 1980s — is that they lack entrepreneurial spirit.
They are talented, well-connected, financially savvy and perfectly capable of running large institutions. But they are not risktakers in the way that Henry Kravis, Theodore Forstmann and Steve Schwarzman were in the early days, critics say.
This week, that suggestion was met with a stiff rebuttal.
Three senior executives from Kohlberg Kravis Roberts and Blackstone decided to leave the buyout firms where they had been working for more than 15 years, to set up new ventures.
At KKR, it was Ned Gilhuly and Scott Stuart who had been widely seen as candidates to replace founders Mr. Kravis and George Roberts. After their departure at the end of the year, the two 45year-old former roommates at Stanford University will be trying their luck by setting up a fund dedicated to minority investments in public equities.
At Blackstone, Mark Gallogly, who headed the private equity group, served on the investment committee and was one of the top dealmakers for media investments, is making a similar move.
While Blackstone has not yet made an official statement on Mr. Gallogly, KKR’s founders were quick to recognize the entrepreneurial urge that had gripped their more junior partners. “ As entrepreneurs ourselves, we understand and respect the desire to start a new enterprise and want to wish them well in the future,” Mr. Kravis and Mr. Roberts said in a joint statement.
Many private equity observers say the departures will raise questions about the benefits of scale in the industry. Some people would rather be part of smaller, more nimble operations than the large institutions some buyout groups have grown into.
And should more senior executives being groomed for leadership in the industry decide to leave to run their own operations, it could create a disturbing lack of successors.
“ As these firms get bigger they have to think about things like making careers for their people, where early on they didn’t because they had small shops,” said John O’Neill, who works with a number of private equity clients at Ernst & Young. “Many firms today are thinking very actively about succession planning — both in terms of governance and in terms of economics.”
More specifically, some say this week’s departures could raise questions about succession planning at KKR and Blackstone. Critics argue that Mr. Gilhuly and Mr. Stuart of KKR may be leaving because the founders have been too slow to relinquish control. At Blackstone, they say that Mr. Gallogly may be departing because he was effectively cut out of the succession race when Hamilton “ Tony” James was selected president — a promotion widely seen as an anointment to future leadership by Mr. Schwarzman.
But KKR and Blackstone insist there has not been any acrimony in the departures.
Warburg Pincus was among the first private equity groups to impose generational change, as founders Lionel Pincus and John Vogelstein handed the baton to Chip Kaye and Joe Landy in 2002.
Financial Times