Private equity's strange love affair with hydra-headed leadership

PRIVATE equity partners love to talk about the crisp, no-nonsense management and oversight they apply to the companies they own.

Why, then, do buyout firm founders insist on entrusting their creations to one of the worst management models by repeatedly appointing co-chief executives when they leave?

That is, if they leave at all. Private equity titans are also among the least eager to clear their desks. They prefer to torture governance orthodoxy and nomenclature by hanging around as "executive co-chairmen", the title Henry Kravis and George Roberts, co-founders of KKR, now hold. They have just appointed Joe Bae and Scott Nuttall as co-chief executives in their stead. Their successors had already served four years as co-presidents and co-chief operating officers of the group.

I am deeply sceptical about hydra-headed management, even though I recognise that leadership is a team game, not an ego trip. So I'm puzzled that the two-heads-better-than-one approach has such a long pedigree in private equity in the US.

It is nearly 20 years since the founders of Warburg Pincus handed the reins to co-presidents, later co-chief executives. Carlyle's three co-founders appointed co-chief executive officers (CEOs) when they drifted upstairs in 2018. TPG Capital's founders moved to a half-in, half-out dual-head model, adding Jon Winkelried as co-chief executive alongside co-founder Jim Coulter in 2015 with David Bonderman, the other co-founder, as chair.

The shared leadership structure is rooted in the origins of the groups themselves. Buyout groups are not so different from startups, where two or three founders share management duties. After KKR's third co-founder Jerome Kohlberg left in 1987, cousins Kravis and Roberts evolved a beguiling and successful double act, founded on complementary traits. They have been caricatured, respectively, as the extrovert and the introvert; the globetrotter and the homebody; with bases in New York (Kravis) and California (Roberts), and sensibilities to match.

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As in family businesses, though, difficulties arise when generational change looms, as the new season of the television hit Succession illustrates. There, patriarch Logan Roy tries to play his children and would-be successors off against each other, to the detriment of his media empire.

Power share or struggle?

In a new working paper about leader transitions at buyout groups, Josh Lerner of Harvard Business School and Diana Noble of Kirkos Partners, a private equity advisory group, refer to rocky handovers that in one case prompted as many as 12 partners to quit. "Very few of these transitions . . . leave everyone completely happy," one bruised general partner told them.

Firms' limited partners or third-party investors are particularly unhappy. One said succession outcomes were "determined more by struggles for power than elegant process". That makes me think buyout groups may be using dual CEOs in part to dilute the internal rivalry that a chosen one would stir up.

Noble and Lerner found some groups wanted to give star investors a chance to continue practising their art, rather than bogging them down in day-to-day operations. Others selected co-chiefs because of the growing size and complexity of the business. Except, what could be more complex than a business run by two chiefs, overseen by a couple more ex-chiefs wielding executive powers from the board room?

There's little evidence that dual leadership has harmed KKR, which also boasts co-heads of some divisions. Its shares have more than doubled since the start of 2020 and it has US$429 billion of assets under management. There is a lot for 2 people to run.

That said, I predict an eventual shift to one leader, as has occurred at TPG, Warburg Pincus and Carlyle. I also suggest Bae and Nuttall steer clear of making any premature declarations of undying love for each other.

After Kewsong Lee and Glenn Youngkin became co-CEOs at Carlyle, they gave a 2018 interview to Bloomberg Businessweek that repeatedly emphasised how in sync they were. "There's no more succession planning here. We're going to win together," Youngkin gushed. Last year, he stepped down, leaving Lee in sole charge.

Every business is different. Job-shares can work in other roles. But few bespoke management arrangements beat clear executive authority and responsibility under the supervision of independent boards and chairs.

What is odd about the persistence of the dual model in private equity is that buyout partners know this well. At their own portfolio companies they recognise it is usually easier to lop off the head of a single underperforming chief executive than to wrestle a hydra into submission. Given the sheer size and influence of private equity, it is time they followed their own advice. THE FINANCIAL TIMES