Fall 2021
Article
Journal of Alternative Investments

When to Go and How to Go? Founder and Leader Transitions in Private Equity Firms

By: Josh Lerner and Diana Noble

Format:Print

Abstract

Leadership transition in private equity firms is an understudied field, despite the important, albeit controversial, role such firms play in developed economies. We analyzed 260 firms in an empirical study, supplemented by qualitative interviews with a small sample of highly experienced limited partners (LPs) and general partner (GP) founders and leaders who have experienced such transitions first-hand. Our research shows that private equity transitions manifest very differently from those in better studied public corporations. It appears that a) founders and leaders in GPs stay in their positions considerably longer than other sectors, b) they are more likely to move on once they are outperforming, and c) if underperforming, their firms are more likely to see an uplift from a transition. In addition, d) transitions are idiosyncratic, internally driven processes with little accepted best practice or governance, e) these processes are frequently characterized by some frictions, and f) LPs have observed many sub-optimal processes and would prefer greater transparency.