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NATIONAL ASSOCIATION OF REAL ESTATE INVESTMENT MANAGERS 28 In short: Is a succession plan something that investors want to see, but actual succession something that they would rather not? In one of the most frustrating examples of this attempt to mitigate risk dictating behavior is if senior personnel leave right after a fund-raise, having had the intention all along or for at least part of it. Not wanting to have the open conversation or rock the boat, they elect instead to leave right after a close, hoping the years between fundraises will allow water to pass under the bridge, good investments to be made and new faces to become more familiar. Funds may be loath to introduce new styles and personalities. As one source commented, when thinking of future leaders that investors will like, they may choose and present those that fit the model of, "If you like Bob, you'll like Andrew." In hiring, at all levels, many managers, whether consciously or subconsciously, often look for carbon copies of themselves, or even jokingly asking for "clones" of their star performers when bringing on new talent. While a strong company culture and focus is crucial, different people bring different strengths and a readiness to adapt is good. A complicating factor in the real estate industry is that many firms are not collectives but rather dominated by one or two personalities at the top. In corporate private equity, it is more common to have several senior partners. More power in fewer hands means each pair of hands is that much more important to the story and underwriting. Firms may add more people to the equation to dilute the importance of a single person, or choose to keep power in those same hands for as long as possible. MAKING SMART SUCCESSION AN ADVANTAGE Not only do management teams need to understand the importance of succession and make succession a key part of their jobs, they must also clarify for themselves and their investors how succession is a key strategic advantage. Like other industries, real estate investment managers will succeed over the next 10 years because they are able to adapt, not because they remain the same. If succession is done well, it's almost impossible for outsiders to know exactly when it begins. Investors have years to get to know future leaders of the firm. Future leaders are included in LP interactions and socialized for years, not months. The good news, in terms of LP-driven behavior, is that the best successor is almost always the organic one from within. They are not only more familiar to investors and easier to underwrite and understand; they also have been given the time necessary to integrate with the firm's culture and ethos. The most impactful and successful succession hire is often not the banner senior placement. It's the professional who comes in as the "heir apparent", or even earlier. The former— or the "arranged marriage", as one fund manager calls it— can be successful. However, just as with real-life arranged marriages, it takes time for all parties to learn how to work best together and those synergies may not be immediately apparent to GPs or LPs. ANOTHER TYPE OF INVESTOR TO EMERGE If there isn't a focus on succession, it will create opportunities for another type of investor: the acquirer. Succession doesn't happen overnight. If it's "too late" by the time it's needed, the best exit-strategy or path forward for all parties – founder(s), talent within the firm, and acquirer – is to merge and/or be acquired, adding not just capitalization but new growth opportunities. WHAT'S TO COME? The term "founder" is often still used interchangeably with "leader" in many real estate private equity firms. It's a hallmark of the real estate world, and its growth over the last 30 years, that founder and leader often remain one in the same. But in the future, as transitions happen, the leaders will not be the original founders. With limited data points to date ahead of the upcoming wave, in many instances, it's too soon to say how investors will react to actual succession. For this reason, it may be assumptions that are at work. As Billie Jean King said, "You have to see it to be it." Funds and LPs may be feeling their way through this new issue together. Jennifer Novack is Head of the Global Real Estate Practice at Sheffield Haworth, a financial services focused executive search and advisory firm with twelve offices globally across the US, Europe, Middle East and Asia. Over the past decade plus, Jennifer has partnered with top-tier investment managers to achieve their vision and create value through hiring transformational talent.