Over the last five years, the private equity (PE) industry has seen a historic $3 trillion in fundraising, fueled by increased investor enthusiasm. However, this influx has brought challenges to generating attractive returns amid rising competition among firms, record-high valuation multiples, and changing market dynamics. One often overlooked but highly impactful consideration is succession planning—not only for PE portfolio companies but also for the firms themselves.
With CEO turnover at portfolio companies occurring at a staggering rate of 73%, unplanned leadership changes can extend hold times, reduce returns, and undermine investor confidence. Similarly, private equity firms must prepare for succession to maintain operational excellence and investor trust as leadership transitions loom.
This article explores succession planning’s critical role in portfolio companies and PE firms, uncovering best practices, common mistakes to avoid, and actionable insights for building seamless transition strategies.
What Is Succession Planning for Private Equity Portfolio Companies?
Succession planning focuses on maintaining a company’s talent pipeline to ensure smooth transitions when key leaders leave. Many misunderstand succession planning as merely replacing executive positions, such as the CEO. However, effective planning involves nurturing talent across organizational levels and preparing employees to assume greater responsibilities.
As Paul Brennan, Chairman of private equity-backed OnApp, aptly describes: “A succession plan is not only good for the business but for its potential buyer—it’s the insurance that underpins the value of the existing team. Without a succession plan, an acquirer is essentially buying intellectual property (IP) without assurance of continuity.”
Traditionally, PE firms bought businesses, implemented operational improvements, and exited within four to seven years. But today’s PE landscape often adopts a “buy-and-transform” approach, focusing on long-term value creation, organizational development, and operational excellence. As 50% of a company’s value can be attributed to intangible assets like leadership and brand, effective succession planning is now indispensable for portfolio companies striving to meet these demands.
Why Succession Planning Matters
Frequent CEO Turnover Is Costly
Studies show portfolio company CEOs face exceptional pressure under PE ownership, with 73% of CEOs replaced during the investment lifecycle—58% within the first two years. Nearly half of CEO changes are unplanned, leading to longer hold times (82% of cases) and unfavorable internal rates of return (46% of cases). The first year of ownership is critical for driving forward momentum, yet many CEO replacements occur after this crucial window, missing opportunities for impact.
Without robust succession plans, unanticipated leadership changes can derail productivity, stall value creation, damage morale, and hurt investor confidence.
Don’ts: Common Mistakes in Portfolio Company Succession Planning
- Don’t Hire Based Solely on Credentials
While extensive experience and credibility seem reassuring, they often mask mismatched leadership styles or outdated playbooks. Effective leaders in PE-backed firms must excel in accelerating growth, adapting to strategic shifts, and building dynamic teams—not just replicating past successes. Soft skills like resilience, authenticity, and a bias toward action are just as crucial as technical expertise.
Leaders who embrace employee development and foster talent leave a more lasting impact, even within PE’s limited timeframes. CEOs who prioritize employee growth—focusing particularly on individuals with the greatest influence—position their organizations for long-term success.
- Don’t Lack a Ready Pool of CEO Contenders
Delays in CEO replacements stall strategic initiatives and erode value. Savvy PE firms ensure readiness by maintaining a network of pre-vetted executives capable of stepping in quickly. Performing honest evaluations of current leadership against the value creation plan—and acting decisively to make changes where necessary—is a hallmark of experienced PE teams.
Do’s: Best Practices for Portfolio Company Succession Planning
- Do Extend Succession Planning Beyond the C-Suite
Focusing solely on the C-suite neglects the broader talent pipeline required to sustain organizational value. Companies that prepare mid-level management to step into higher roles respond more effectively to leadership changes, reducing disruption. Internal promotions also lead to faster onboarding, greater alignment with company goals, and increased buyer confidence during an eventual exit. Conversely, reliance on a singular leader deters potential buyers wary of that dependency. - Do Rigorously Evaluate Soft Skills in Leadership Recruitment
While technical competencies like financial acumen or sales expertise are relatively easy to assess, leadership and strategic thinking are more difficult yet equally critical for portfolio company success. Psychometric evaluations, behavioral interviews, and third-party assessments help PE firms select leaders whose personal characteristics align with fast-paced transformation and value creation demands. - Do Incorporate Leadership Capital Partners (LCPs)
Over 50% of PE firms now employ leadership capital partners (LCPs) to guide succession planning and leadership evaluation. By analyzing cultural and organizational dynamics, LCPs aid in identifying leadership gaps, improving team alignment, and ensuring talent strategies align with broader value-creation objectives. LCPs also play integral roles in facilitating cultural audits, coaching management teams during the transformation process, and advising on post-exit continuity strategies. - Do Set Expectations Early
Misaligned expectations between PE firms and portfolio CEOs—such as pace of transformation or performance targets—can sour relationships and inhibit productivity. Given that 78% of PE firms cite “misalignment around pace of change” as a recurring friction point, establishing clear agreements early on regarding communication frequency, KPIs, and management oversight is essential for alignment.
Succession Planning Within Private Equity Firms
Succession planning isn’t just important for portfolio companies; PE firms themselves are increasingly facing the need to develop clear leadership transition strategies. With funds often spanning over a decade and founders of major firms like Blackstone, Carlyle, and KKR aging into their 70s and 80s, ensuring continuity for investors and internal teams is more critical than ever.
Recent data underscores this trend:
- Team stability and composition are top predictive metrics for future performance, according to investor surveys.
- Young talent increasingly demands clear career advancement paths, necessitating structured transitions to retain rising leaders.
- Historically, nearly half of PE firms lacked formal succession plans, though leading firms like Bain Capital and KKR have begun addressing succession proactively by promoting talented younger executives.
Best Practices in PE Firm Succession Planning
- Maintain Incentives for Emerging Leaders
To retain rising talent, it’s crucial to ensure that compensation aligns with contributions. Senior partners must be willing to gradually reduce their share of economic rewards as they relinquish responsibilities. Strategic options include reallocating carry (profit share) to younger team members or setting up new management companies to transition ownership over funds. These measures prevent morale erosion while fostering collaboration between senior and junior leaders. - Anchor Succession Plans in Objective Valuations
Valuations form the foundation for effective succession planning by clarifying how income (from management fees and carry) will be allocated. Valuation approaches should distinguish between predictable streams like management fees and more unpredictable carry, incorporating discounted projections to account for performance risk. Many firms engage third-party valuation specialists to ensure fairness and transparency in these critical calculations.
Conclusion: The Case for Proactive Succession Planning
Succession planning might feel uncomfortable or unnecessary at first, but it is a vital exercise that pays dividends. For portfolio companies, it ensures leadership alignment, prepares businesses to adapt to transformative shifts, and boosts long-term buyer confidence. Within PE firms, successful succession planning fosters internal cohesion, ensures continuity for investors, and creates opportunities for the next generation of leaders.
When approached thoughtfully, succession planning becomes more than just a risk mitigation strategy—it becomes a powerful tool for sustaining organizational value and securing competitive advantages in an evolving private equity landscape.