A Reuters headline in May stuck out to attorneys at Barnes & Thornburg, a firm with more than 800 professionals in offices across the country: Buffett talks succession and Berkshire’s future at annual meeting. It was a rare positive article about change-of-leadership planning gone right — or happening at all — that the law firm hoped clients would heed.
Virtually every investor is worried about succession planning (or lack of it) at the asset managers they’ve given capital to; 96 percent of limited partners said it was important for a fund to have a succession plan in place, up from 66 percent last year, according to the second annual investment funds outlook report by Barnes & Thornburg.
Meanwhile, managers appear to be even less concerned about leadership changes than before. Only 38 percent of general partners currently have a succession plan, down from 41 percent in 2023. Fewer asset managers are in the process of implementing a plan, too. This year, 31 percent are working on a strategy compared to 33 percent last year. Fifteen percent aren’t considering a plan at all, nearly double the 8 percent who had it on the back burner last year.
The step backwards by GPs this year didn’t come as a surprise to the law firm. Asset managers are prioritizing other things during a tough market and as their profit margins thin. Private equity firms, for example, are trying to figure out how to deploy a mountain of capital, get new commitments during a tough fundraising environment, and are “fighting fires” in their portfolios.
“Both LPs and GPs acknowledge that the costs of launching and operating a private fund have steadily increased, with the legal costs associated with fundraising and compliance being a key component,” says Scott L. Beal, a partner and co-chair of the private funds and asset management practice at Barnes & Thornburg.
Even though more than half of the managers surveyed had a plan in place or were developing one, conversations about the plans have been limited. Just 16 percent of managers have held discussions with stakeholders about succession plans. GPs with succession plans said they made them for a variety of reasons including cost savings, governance priorities, and as a hedge against disruption to their business. Only 20 percent of GPs attributed their plans to pressure from LPs, which the law firm said suggests that some investors may not be making their voices heard on the issue.
Beyond causing some investors anxiety, the lack of succession plans could have broader impacts on the asset management industry. The failures to plan could be contributing to more consolidation in the industry, according to the report.
“After all, selling off a fund to another manager could be an effective business opportunity and a way to avoid some of the issues that arise during succession,” the report says.
