A generation of hedge fund founders is arriving at a crossroads. By one estimate, around $600 billion of the industry’s assets are managed by firms whose founding principals will reach at least their sixties in the next decade. As they begin to contemplate retirement or devoting time to other projects, founders are considering a fundamental question: Do I want the firm to continue after I leave the stage? Some founders will choose to wind up the firm. Others, however, will want to leave behind an institutionalized business. One way to do that is to sell a significant stake in the firm to an outside investor. Alternatively, the founder may decide to groom a successor generation of leadership and make operational adjustments designed to let the firm thrive as an independent organization after the founder’s departure. This guest article is about the latter approach to institutionalization – preparing to bequeath a free-standing franchise to the manager’s remaining principals and employees. More specifically, this article addresses the imperative of advance planning for leadership transitions; choosing new leaders; the treatment of the founder’s economic interest in the firm; retaining and motivating key talent; and a variety of issues concerning succession execution, including investor communications, consent issues and key-man provisions in partnership agreements. The authors of this article are Scott C. Budlong, William Q. Orbe and Kenneth E. Werner, all partners Richards Kibbe & Orbe LLP. In a subsequent companion article, Budlong, Orbe and Werner will explore the possibility of selling an interest in the manager to a third party, where, in a different context, the institutionalization process is also important. For more on succession planning, see “Key Considerations for Hedge Fund Managers in Developing a Succession Plan (Part Two of Two)
,” Hedge Fund Law Report, Vol. 5, No. 8 (Feb. 23, 2012).