Planning for the unexpected

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Joel Press, Press Management

By Joel Press, Press Management – In previous columns we have addressed the topic of Succession Planning in the context of factors to consider, and also the transition of leadership from a Founder to a named successor.  Those discussions presumed that the Founder and management team had the time and ability for thoughtful discourse and planning to insure an orderly transition. Unfortunately that is not always the case. 

What happens if the Founder unexpectedly passes away, or is incapacitated due to an accident or serious illness and can no longer manage the firm? In these situations you don’t have the luxury of time to plan, and in the case of the death of the Founder, may not have their insight or wishes to guide you in decision making.  This process can be simplified if a Founder codifies a succession plan well before one is ever needed.  In that case all one would need to do would be to follow the steps as outlined.  

That is why my advice for new managers is to work on a “Death/Disability/Retirement Plan” at the same time they are putting together their documents to launch their fund, or soon after.  

Realistically few managers have the energy, or desire, to think about the possibility of ever shutting down when they are launching so they put this process on the back burner.  I think of this process similar to entering into a prenuptial agreement prior to a marriage; planning in advance, while uncomfortable, will save many headaches later if the document is needed. 

The Founder should be thinking of this from two distinct and equally important and interrelated perspectives; as the fiduciary of investor’s capital the Founder wants business operations and portfolio management should continue seamlessly, and as the owner of often the largest portion of the management company and a significant amount of invested capital the continued success of the firm is key to preserving assets for the Founder and family.   

When faced with the sudden reality of a Founder who can no longer operate the firm and supervise the portfolio the key question is who becomes the person in charge? Is the same person responsible for portfolio management as well as firm operations?  This discussion presumes that the Founder has maintained control of ultimate decision making of both portfolio structure and business operations.

In the best case the Founder would have prepared a letter of instructions or direction in the founder’s will naming specific individuals to take on responsibilities within the firm. Without a letter detailing a plan for such a scenario, if the Founder is disabled, the individual holding the Founder’s Power of Attorney would represent the Founder’s interests; in the event of the Founder’s death, it would be the executor of the Founder’s estate. Without  direction in Founder’s will or a letter of wishes to stipulate who that person will be, the holder of the Power of Attorney or the executor of  the Founder’s estate – which could be the founder’s spouse, friend or an institution – would likely run the firm or name the person to oversee operations and portfolio management. 

If an outsider were to be named to this role, it could lead to potential ongoing leadership issues, and tremendous discord within the firm. A disruption of operations at the management company level might create a potential breach of the management company’s fiduciary responsibility to investors if fund assets are not properly managed. 

If the Founder’s spouse is named, they will suddenly be responsible for running the management company and overseeing the portfolio. If they are not knowledgeable about the business, in the interests of protecting the estate, they might fire analysts, traders, or other staff to lower overhead in the belief they are acting in the best interests of the estate to preserve the capital of the family. These are only the internal issues.  A larger issue will be the perception of investors that the firm may no longer be managed under strong professional leadership. Loss of significant assets will quickly diminish any value in the management company. Both the internal and external issues could lead to the loss of valuable staff needed for continuity. 

To avoid getting into such difficulties, a document should be created detailing what the transition of leadership would look like so there can be no question as to who can take what actions, how decisions are made, and representation of firm leadership and Founder’s representatives within the management company structure. This letter of instruction would be utilized in any situation where the Founder was no longer able to actively participate in the management of the portfolio or the operations of firm. 

Needless to say, in either scenario, the newly appointed leader of the firm should be someone who understands the needs of the fund, and the vision of the Founder on the options available: try to continue the fund in the current form (if this is the desired option, the economics to the Founder’s heirs and continuing fund management need to be documented as outlined in the previous succession planning blogs), close the fund, or try to sell the firm. 

The Founder therefore needs to create a linkage of the transition for the business with the estate. The family, and other members of firm leadership, needs to know that everything is synchronised and that the best interests of all parties have been considered. All of the legal considerations around the Founder’s wealth and financial wellbeing have to be brought into context so that the implications of death are understood. 

Typically, I work with Founders to create all the critical terms and processes necessary, from both the business and estate points of view.  Once that is done and the term sheet is completed I then bring in the attorneys representing the business and the Founder’s estate planning to codify the documents. This process helps minimises legal costs and cuts down the number of drafts needed. 

It’s an uncomfortable thing to have to think about but by avoiding it, you’re opening up the potential for disruption of the firm, resulting in decreased franchise value as well as increased legal expenses for the estate and the firm.

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