Etude

Getting Leadership Transition Right in Private Equity

Moving past the founder can be challenging, but installing the next generation of leaders is an opportunity to make the firm stronger.

Par Joost Spits, Graham Rose, Hugh MacArthur, Alan Johnson, Chris Connors, et Bryan Liou

First published on octobre 22, 2026
min


Of all the deals a founder works through as the leader of a private capital firm, succession may be the trickiest. It’s easy to regard cashing out as a math problem aimed at fair compensation for stewarding years of growth. But inevitably it turns into much more than that. Succession triggers a long list of questions about how the institution is structured, who’s going to run it next, and how to reshape the economics to enhance growth, not encumber it. Written in collaboration with Written in collaboration with The central issue: how to balance liquidity and legacy so the founder or cofounders get their due and the firm can continue to thrive and maintain hard-won investor confidence. As difficult as that can be, the firms that get it right view founder succession as a rite of passage. Leadership transitions, after all, are the cost of success. Moving to the next generation is a natural opportunity to recalibrate the firm’s economic, leadership, and governance models to better match its evolving strategic and growth ambitions. The lessons learned and muscles built can be used repeatedly as the leadership team grows and evolves. The succession paradox: Liquidity, legacy, and the cost of waiting The key opening question in a founder transition is one that may never have been on the table before: Does the firm’s leader want to maximize their payday, or is the objective to preserve a legacy forged over decades of sweat, dealmaking, and relationship building with investors? Usually it’s some combination of both, but teasing out whether there’s a genuine commitment to creating an institution that endures shapes everything that comes next. The temptation is to delay making choices and keep all options open. But as the firm grows and becomes more valuable, the options actually narrow. The reason is a paradox: The more successful a firm has become, the harder it is for the next generation of leaders to take over. The existing team may have plenty of wealth on paper, but much of it is illiquid and exposed to varying degrees of risk. Outside capital is an option, but that can be expensive and potentially constraining. The firm’s value, meanwhile, gets out of reach fast (see Figure 1). Figure 1 Even a deal to transfer just 1% of equity quickly becomes unaffordable for the leadership team hoping to purchase it Source: Bain & Company Cashing out, then, requires a complex and nuanced agreement that balances how much can be paid out to the founder now vs. how much control or economic participation the executive will retain over the transition. That leads directly to three interrelated questions: How should the economics transfer? What leadership and governance model should replace the founder-centric one? And how does the firm maintain limited partner (LP) confidence along the way? Waiting only makes those questions harder to answer. Leadership transitions unfold over multiple fund cycles; trying to implement them without disciplined forward planning reduces alternatives, increases execution risk, and ultimately diminishes the value of the firm. Starting early does not mean naming a successor early. It means putting the architecture in place before the transition is underway (see Figure 2). Figure 2 Equity transition requirements grow with the firm, but it pays to begin planning as early as possible in the founder’s journey Source: Bain & Company Economics: How do you pay for the past without starving the future? If the founder’s primary goal is cashing out at market value, this question may already be answered. To create that much liquidity, the firm will likely have to sell a minority or majority equity stake, take on debt, or even go public—largely bypassing the existing team. Yet in practice, many founders want some sort of hybrid solution, using outside capital to fund a degree of liquidity while preserving enough equity to retain and reward the next generation of leaders. That likely means wholesale change in who owns the enterprise and makes decisions. If the firm expects to keep its rising talent, it will have to offer key people equity and meaningful control over the value they are expected to create. A strong economic model differentiates between value already created and value yet to come. The founder has a legitimate claim on franchise value built over decades, but preserving an independent legacy may require accepting less than the price an outside buyer would pay. Not only is the next generation’s liquidity constrained, but there’s a fairness issue: The new team shouldn’t be expected to pay full value for the past while also carrying responsibility for the future. The right solution will award management disproportionate participation in future growth and stress test any payouts to the founder against actual cash flows and debt tolerance. No matter how elegant the new model may look on paper, it’s not a succession plan if it can’t actually be funded by its intended participants. The question is, how much can the existing team realistically contribute? How much is based on carry vs. fee-related earnings, and how are those flows changing at a time when the average buyout holding period has stretched to seven years and returns are under pressure? Is the blend of rewards and responsibility sufficient to affect behavior and retention? No matter how elegant the new model may look on paper, it’s not a succession plan if it can’t actually be funded by its intended participants. These questions lead to others as the firm designs a new economic structure to support the kind of institution it aims to become. Who, for instance, should participate in enterprise ownership vs. economics tied principally to the success of an individual strategy? How should that evolve as an investment professional takes on different roles? How much ownership and upside will it take to motivate and retain the talent the firm is competing for? How can economics become a lever to encourage “enterprise behavior” that fosters collaboration and breaks down silos across strategies? A plan structured to gradually reduce the old guard’s participation in carry or fee-related income can be an effective way to preserve alignment and reward the founder for handing over a healthy franchise. But it is important that this is a finite proposition. While many firms operate effectively with some level of passive ownership, these arrangements can pose challenges if not managed carefully. The firm’s economics are a fixed pie, and every share of ownership or carry retained indefinitely by a retired founder, former partner, or investor with a general partner (GP) stake is no longer available to motivate active professionals. It’s also true that retained economics can sometimes amount to retained control. Without clear boundaries, that can be disruptive for new leaders looking to put their own stamp on the firm. Leadership and governance: What model will take us to the next level? Questions about economics are intimately linked to the leadership model you are building. The “Who’s next?” question is often framed incorrectly. It’s not simply “Who will replace the founder?” but “What has the founder been doing, and how can a more mature organization do it differently (and hopefully better)?” A founder’s role typically extends much deeper than the CEO level. Founders tend to touch pretty much everything: approving investments and exits, setting strategy and allocating capital, selecting and compensating partners, nurturing relationships with LPs. Often out of habit, they are making countless operational and financial decisions that a scaled company would distribute across a professional management team. The opportunity is to establish a new model that better supports the growing firm’s ambition and strategy. No single successor can (or should) duplicate the founder’s combination of financial ownership, personal authority, and informal influence over all aspects of running the firm. The real transition is from a founder as the operating system to a more mature institution with explicit roles, committees, and processes. Before considering who goes where—and how they are compensated—the firm has to redefine the operating model to best distribute power and decision making. There’s no right answer here. But as power is distributed across a broader set of leaders, it only works if the decision rights are clear, each leader has recognized authority in their domain, and incentives reinforce teaming, not competition. Top leaders also need to buy into a shared vision for the strategy and culture they are inheriting. For a scrappy, entrepreneurial firm that has lived deal to deal for years, the key considerations in building a more robust leadership model may seem unfamiliar: What operating roles do we need to add to support the managing partners, and who will they report to? How will business unit, asset class, and functional leaders participate in the running of the firm? What committees should be formed, and what roles should be represented on them? The importance of mapping decision making can’t be overstated. A transition that leaves “who decides” to habit will inevitably produce a disruptive standoff at the first hard call. As the firm evolves its operating model, it will need to add newly professionalized functions—investor relations or human capital, for instance. That means decision rights have to be redistributed and a clear schedule established for when decisions transfer. It’s unworkable to expect the next generation to assume full accountability while the founder retains power over the most important decisions. Once the operating model and leadership roles are defined, the next step is deciding who should fill them. This is an extended period of development and testing, and it may reveal that the firm needs to look externally for the right candidate to lead its next chapter. Timing matters here. Naming a successor too early can create winners and losers and destabilize the senior team. Yet waiting too long carries an equally serious risk: The firm can effectively skip a generation. By the time the founder is ready to step back, the natural successors may have left or be nearing their own transitions, while the generation behind them has not yet developed sufficiently. A plan to groom the next generation might involve identifying two to four potential leaders years out and giving them consequential roles in strategy, fund-raising, investment governance, talent, and the operation of the firm. The objective is to see who can broaden beyond investing and earn the trust of colleagues and LPs, or whether the firm should be seeking outside talent. It’s also important to identify any high performers whose “toxic” behaviors could drive away valuable talent if they are promoted. Naming a successor too early can create winners and losers and destabilize the senior team. Yet waiting too long carries an equally serious risk: The firm can effectively skip a generation. The strongest investor, of course, is not always the best leader. Running a scaled alternative asset manager requires capabilities that may differ sharply from those involved in successful dealmaking. Other senior partners aren’t ordinary employees. They are investors, revenue producers, owners, and potential competitors. It takes a special executive to build trust and alignment among co-owners. This is especially true if the founder remains in the picture with a vague but still powerful remit. It’s essential to define what exactly the founder will continue to do in this new structure. An executive chair or board chair role can preserve relationships, investment judgment, and institutional memory, especially within the scope of select mandates like mentoring or managing key LP relationships. But precision is important. Which meetings and committees will the founder join? Which decisions will they continue to influence? When will those decision rights expire? Without clear boundaries, the founder can become a second “super voice,” leaving a successor with the title but no mandate. Confidence: How do you build trust in the new team? For LPs, the specific shape of the organizational chart matters less than a pair of questions that boil down to trust: Who will be responsible for our capital over the life of the fund, and what evidence do we have that the team will continue to perform? LPs aren’t underwriting the firm’s historic track record. They are assessing whether the new team has the chops and motivation to extend performance into the future. Ownership, leadership continuity, decision authority, and retention all become legitimate diligence issues. Confidence comes from understanding who the new team is and seeing them in action. By the time the firm issues a succession announcement, LPs should already have warmed to the future leaders. This is why transitions typically take years rather than months. LPs need to see the next generation of leaders playing increasingly prominent roles in fund-raising and firm operations, not just delivering canned PowerPoint presentations. Critically, the founder’s external visibility should wane as the next generation’s increases. Future leaders should assume more airtime in the LP dialogue, answering tough questions and articulating the firm’s secret sauce. This handoff should be as gradual as need be. For many long-time investors, the firm and the founder may be indistinguishable, meaning the founder’s continued involvement can provide reassuring continuity. But there should be a defined sunset. A founder who remains involved in every critical decision is telling investors that the next generation lacks a real mandate. Rather than providing a bridge to the new leadership, the founder becomes a competing center of power. Indeed, LPs are hardly blind to dysfunction. They will notice a successor who lacks the backing of senior colleagues just as they register unexplained departures, visible factions, and undercompensated investment leaders. A polished communications plan can’t obscure a transition that is not working internally. What does success look like? A successful founder transition is not one where everyone ends up happy. There’s too much at stake for that. Money, authority, status, and identity are all being redistributed. Feelings will be hurt; some people will leave. Avoiding a fractured partnership, however, relies on transparency and active management. If the new leadership model is credible and the economics supporting it are sound, success will follow. A durable transition leaves the firm with a clear strategic direction; leaders who have been tested, accepted, and given genuine authority; economics aligned with future contribution, sufficient to retain and motivate the next generation; a founder who continues to add value without compromising new leadership; and LPs who understand who and what they are backing. There’s nothing easy about reshaping an institution that is capable of thriving without the founder. But learning to manage transitions well will continue to pay dividends as the firm grows. Every transition is different. But with careful planning, each one provides an opportunity to ensure that the firm’s economic, leadership, and governance models still support its strategy. About Johnson Associates Johnson Associates is a specialized premier compensation consulting firm with second-to-none experience designing executive compensation programs for the largest financial service firms to more specialized boutiques. We have been an independent privately owned compensation consulting firm for over 30 years. On point, our overwhelming focus is providing compensation design advice and current market information for global and regional firms in the financial services space.

Of all the deals a founder works through as the leader of a private capital firm, succession may be the trickiest.

It’s easy to regard cashing out as a math problem aimed at fair compensation for stewarding years of growth. But inevitably it turns into much more than that. Succession triggers a long list of questions about how the institution is structured, who’s going to run it next, and how to reshape the economics to enhance growth, not encumber it.

Written in collaboration with

The central issue: how to balance liquidity and legacy so the founder or cofounders get their due and the firm can continue to thrive and maintain hard-won investor confidence.

As difficult as that can be, the firms that get it right view founder succession as a rite of passage. Leadership transitions, after all, are the cost of success. Moving to the next generation is a natural opportunity to recalibrate the firm’s economic, leadership, and governance models to better match its evolving strategic and growth ambitions. The lessons learned and muscles built can be used repeatedly as the leadership team grows and evolves.

The succession paradox: Liquidity, legacy, and the cost of waiting

The key opening question in a founder transition is one that may never have been on the table before: Does the firm’s leader want to maximize their payday, or is the objective to preserve a legacy forged over decades of sweat, dealmaking, and relationship building with investors? Usually it’s some combination of both, but teasing out whether there’s a genuine commitment to creating an institution that endures shapes everything that comes next.

The temptation is to delay making choices and keep all options open. But as the firm grows and becomes more valuable, the options actually narrow. The reason is a paradox: The more successful a firm has become, the harder it is for the next generation of leaders to take over. The existing team may have plenty of wealth on paper, but much of it is illiquid and exposed to varying degrees of risk. Outside capital is an option, but that can be expensive and potentially constraining. The firm’s value, meanwhile, gets out of reach fast (see Figure 1).

Even a deal to transfer just 1% of equity quickly becomes unaffordable for the leadership team hoping to purchase it

Source: Bain & Company

Cashing out, then, requires a complex and nuanced agreement that balances how much can be paid out to the founder now vs. how much control or economic participation the executive will retain over the transition. That leads directly to three interrelated questions: How should the economics transfer? What leadership and governance model should replace the founder-centric one? And how does the firm maintain limited partner (LP) confidence along the way?

Waiting only makes those questions harder to answer. Leadership transitions unfold over multiple fund cycles; trying to implement them without disciplined forward planning reduces alternatives, increases execution risk, and ultimately diminishes the value of the firm. Starting early does not mean naming a successor early. It means putting the architecture in place before the transition is underway (see Figure 2).

Equity transition requirements grow with the firm, but it pays to begin planning as early as possible in the founder’s journey

Source: Bain & Company

Economics: How do you pay for the past without starving the future?

If the founder’s primary goal is cashing out at market value, this question may already be answered. To create that much liquidity, the firm will likely have to sell a minority or majority equity stake, take on debt, or even go public—largely bypassing the existing team.

Yet in practice, many founders want some sort of hybrid solution, using outside capital to fund a degree of liquidity while preserving enough equity to retain and reward the next generation of leaders. That likely means wholesale change in who owns the enterprise and makes decisions. If the firm expects to keep its rising talent, it will have to offer key people equity and meaningful control over the value they are expected to create.

A strong economic model differentiates between value already created and value yet to come. The founder has a legitimate claim on franchise value built over decades, but preserving an independent legacy may require accepting less than the price an outside buyer would pay. Not only is the next generation’s liquidity constrained, but there’s a fairness issue: The new team shouldn’t be expected to pay full value for the past while also carrying responsibility for the future.

The right solution will award management disproportionate participation in future growth and stress test any payouts to the founder against actual cash flows and debt tolerance. No matter how elegant the new model may look on paper, it’s not a succession plan if it can’t actually be funded by its intended participants. The question is, how much can the existing team realistically contribute? How much is based on carry vs. fee-related earnings, and how are those flows changing at a time when the average buyout holding period has stretched to seven years and returns are under pressure? Is the blend of rewards and responsibility sufficient to affect behavior and retention?

No matter how elegant the new model may look on paper, it’s not a succession plan if it can’t actually be funded by its intended participants.

These questions lead to others as the firm designs a new economic structure to support the kind of institution it aims to become. Who, for instance, should participate in enterprise ownership vs. economics tied principally to the success of an individual strategy? How should that evolve as an investment professional takes on different roles? How much ownership and upside will it take to motivate and retain the talent the firm is competing for? How can economics become a lever to encourage “enterprise behavior” that fosters collaboration and breaks down silos across strategies?

A plan structured to gradually reduce the old guard’s participation in carry or fee-related income can be an effective way to preserve alignment and reward the founder for handing over a healthy franchise. But it is important that this is a finite proposition. While many firms operate effectively with some level of passive ownership, these arrangements can pose challenges if not managed carefully. The firm’s economics are a fixed pie, and every share of ownership or carry retained indefinitely by a retired founder, former partner, or investor with a general partner (GP) stake is no longer available to motivate active professionals. It’s also true that retained economics can sometimes amount to retained control. Without clear boundaries, that can be disruptive for new leaders looking to put their own stamp on the firm.

Leadership and governance: What model will take us to the next level?

Questions about economics are intimately linked to the leadership model you are building. The “Who’s next?” question is often framed incorrectly. It’s not simply “Who will replace the founder?” but “What has the founder been doing, and how can a more mature organization do it differently (and hopefully better)?”

A founder’s role typically extends much deeper than the CEO level. Founders tend to touch pretty much everything: approving investments and exits, setting strategy and allocating capital, selecting and compensating partners, nurturing relationships with LPs. Often out of habit, they are making countless operational and financial decisions that a scaled company would distribute across a professional management team.

The opportunity is to establish a new model that better supports the growing firm’s ambition and strategy. No single successor can (or should) duplicate the founder’s combination of financial ownership, personal authority, and informal influence over all aspects of running the firm. The real transition is from a founder as the operating system to a more mature institution with explicit roles, committees, and processes.

Before considering who goes where—and how they are compensated—the firm has to redefine the operating model to best distribute power and decision making. There’s no right answer here. But as power is distributed across a broader set of leaders, it only works if the decision rights are clear, each leader has recognized authority in their domain, and incentives reinforce teaming, not competition. Top leaders also need to buy into a shared vision for the strategy and culture they are inheriting.

For a scrappy, entrepreneurial firm that has lived deal to deal for years, the key considerations in building a more robust leadership model may seem unfamiliar: What operating roles do we need to add to support the managing partners, and who will they report to? How will business unit, asset class, and functional leaders participate in the running of the firm? What committees should be formed, and what roles should be represented on them?

The importance of mapping decision making can’t be overstated. A transition that leaves “who decides” to habit will inevitably produce a disruptive standoff at the first hard call. As the firm evolves its operating model, it will need to add newly professionalized functions—investor relations or human capital, for instance. That means decision rights have to be redistributed and a clear schedule established for when decisions transfer. It’s unworkable to expect the next generation to assume full accountability while the founder retains power over the most important decisions.

Once the operating model and leadership roles are defined, the next step is deciding who should fill them. This is an extended period of development and testing, and it may reveal that the firm needs to look externally for the right candidate to lead its next chapter. Timing matters here. Naming a successor too early can create winners and losers and destabilize the senior team. Yet waiting too long carries an equally serious risk: The firm can effectively skip a generation. By the time the founder is ready to step back, the natural successors may have left or be nearing their own transitions, while the generation behind them has not yet developed sufficiently.

A plan to groom the next generation might involve identifying two to four potential leaders years out and giving them consequential roles in strategy, fund-raising, investment governance, talent, and the operation of the firm. The objective is to see who can broaden beyond investing and earn the trust of colleagues and LPs, or whether the firm should be seeking outside talent. It’s also important to identify any high performers whose “toxic” behaviors could drive away valuable talent if they are promoted.

Naming a successor too early can create winners and losers and destabilize the senior team. Yet waiting too long carries an equally serious risk: The firm can effectively skip a generation.

The strongest investor, of course, is not always the best leader. Running a scaled alternative asset manager requires capabilities that may differ sharply from those involved in successful dealmaking. Other senior partners aren’t ordinary employees. They are investors, revenue producers, owners, and potential competitors. It takes a special executive to build trust and alignment among co-owners.

This is especially true if the founder remains in the picture with a vague but still powerful remit. It’s essential to define what exactly the founder will continue to do in this new structure. An executive chair or board chair role can preserve relationships, investment judgment, and institutional memory, especially within the scope of select mandates like mentoring or managing key LP relationships. But precision is important. Which meetings and committees will the founder join? Which decisions will they continue to influence? When will those decision rights expire? Without clear boundaries, the founder can become a second “super voice,” leaving a successor with the title but no mandate.

Confidence: How do you build trust in the new team?

For LPs, the specific shape of the organizational chart matters less than a pair of questions that boil down to trust: Who will be responsible for our capital over the life of the fund, and what evidence do we have that the team will continue to perform? LPs aren’t underwriting the firm’s historic track record. They are assessing whether the new team has the chops and motivation to extend performance into the future. Ownership, leadership continuity, decision authority, and retention all become legitimate diligence issues.

Confidence comes from understanding who the new team is and seeing them in action. By the time the firm issues a succession announcement, LPs should already have warmed to the future leaders. This is why transitions typically take years rather than months. LPs need to see the next generation of leaders playing increasingly prominent roles in fund-raising and firm operations, not just delivering canned PowerPoint presentations. Critically, the founder’s external visibility should wane as the next generation’s increases. Future leaders should assume more airtime in the LP dialogue, answering tough questions and articulating the firm’s secret sauce.

This handoff should be as gradual as need be. For many long-time investors, the firm and the founder may be indistinguishable, meaning the founder’s continued involvement can provide reassuring continuity. But there should be a defined sunset. A founder who remains involved in every critical decision is telling investors that the next generation lacks a real mandate. Rather than providing a bridge to the new leadership, the founder becomes a competing center of power. Indeed, LPs are hardly blind to dysfunction. They will notice a successor who lacks the backing of senior colleagues just as they register unexplained departures, visible factions, and undercompensated investment leaders. A polished communications plan can’t obscure a transition that is not working internally.

What does success look like?

A successful founder transition is not one where everyone ends up happy. There’s too much at stake for that. Money, authority, status, and identity are all being redistributed. Feelings will be hurt; some people will leave.

Avoiding a fractured partnership, however, relies on transparency and active management. If the new leadership model is credible and the economics supporting it are sound, success will follow. A durable transition leaves the firm with

a clear strategic direction;
leaders who have been tested, accepted, and given genuine authority;
economics aligned with future contribution, sufficient to retain and motivate the next generation;
a founder who continues to add value without compromising new leadership; and
LPs who understand who and what they are backing.

There’s nothing easy about reshaping an institution that is capable of thriving without the founder. But learning to manage transitions well will continue to pay dividends as the firm grows. Every transition is different. But with careful planning, each one provides an opportunity to ensure that the firm’s economic, leadership, and governance models still support its strategy.

About Johnson Associates

Johnson Associates is a specialized premier compensation consulting firm with second-to-none experience designing executive compensation programs for the largest financial service firms to more specialized boutiques. We have been an independent privately owned compensation consulting firm for over 30 years. On point, our overwhelming focus is providing compensation design advice and current market information for global and regional firms in the financial services space.