Looking for the Next Generation in Private Equity

Over the last few decades, a handful of deal makers have reigned over the private equity industry, wielding vast influence over Wall Street and, more broadly, the world economy.

Now in their 60s and billionaires several times over, these men — Stephen A. Schwarzman of the Blackstone Group, Henry R. Kravis of Kohlberg Kravis Roberts & Company, David M. Rubenstein of the Carlyle Group and Leon D. Black of the Apollo Management Group, chief among them — are surely ready to pass the baton to the next generation.

Yet none plan to step aside any time soon. These founders all answer the succession question virtually the same way. They insist that despite their advancing ages, they are not going anywhere. And, in any case, they say that they think constantly about succession and have plenty of executives who are more than capable of leading their businesses.

“Retirement is unnatural for workaholics, but passing the mantle is not,” said Mr. Rubenstein, 62. He started Carlyle 25 years ago and still runs it with two other co-founders, William Conway, 62, and Daniel D’Aniello, 65. The peripatetic Mr. Rubenstein spent more than 180 days on the road last year.

“There is no one at Blackstone who, if they were hit by a bus tomorrow, the firm wouldn’t continue on unimpaired,” Hamilton E. James, 61, Blackstone’s president, said. “And that includes me and Steve.”

Today, now that these private equity shops are big publicly traded companies (or, in the case of Carlyle, about to go public), shareholders and investors want to know: who will run these companies when they do step aside?

Though the founders have set forth no clear succession plans, they say the concern is overblown. And the Wall Street analysts who follow the companies largely agree.

“There is certainly key-man risk, but when it comes to next-generation leadership, there is a significant talent pool in place below the founding principals,” said Roger Freeman, an analyst with Barclays Capital.

But who is this deep bench of talent that may someday run these companies?

The answer to this question is more than just Wall Street gossip. It has enormous implications for corporate America and global business.

There are 14,200 companies in the United States that are backed by private equity firms, according to the Private Equity Growth Capital Council, the industry’s trade group. Companies backed by private equity employ about 8.1 million people worldwide, the council says. State pension funds have billions of dollars of retirees’ money invested with private equity funds.

And while these businesses are still a small fraction of the size of the largest banks, they have become big, global operations. The largest private equity firms, a group that includes Bain Capital and TPG, now oversee more than just their cornerstone multibillion-dollar buyout funds. They have become diversified money managers that also run hedge funds, real estate businesses and other investment operations around the world.

Along with these changes, a next generation of deal makers has gradually emerged from the shadows of the founders.

On paper, private equity’s new guard is a homogenous bunch. A composite sketch looks more or less like this: A man — and they are almost all men — in his early- to mid-40s with a degree from either the Wharton School at the University of Pennsylvania or Harvard Business School. Some started at the companies right out of college. But most worked for a few years as an investment banker, typically at Goldman Sachs or Morgan Stanley, before joining in the mid-1990s just as the private equity industry was taking off.

Consider Jonathan D. Gray, 42, the head of Blackstone’s global real estate business. He joined the company straight out of Penn and never left, leading Blackstone’s emergence as one of the world’s largest property investors. This year, Mr. Gray joined the company’s board, a clear signal that he is a possible successor to Mr. Schwarzman.

At K.K.R., a number of names have emerged as contenders. Last year, at the company’s investor day at the Pierre Hotel in Manhattan, Mr. Kravis, 68, made it clear that he and his co-founder and cousin George R. Roberts, also 68, were still in charge, while also sending the message that K.K.R. was no longer just the Henry and George Show.

“George and I hear about succession all of the time, and we’re not quite sure why,” deadpanned Mr. Kravis.

“You’re going to hear from about 15 people today and you will see the kind of quality, the people that we have, the deep bench, the strengths that they have, and there’s no question that any number of these people can lead K.K.R. once George and I step down, which I have to say to you is, hopefully, in the distant future,” Mr. Kravis said.

Among the speakers: Scott C. Nuttall, 39, who oversees several of the company’s businesses and serves as a point person for the Wall Street community; Joseph Y. Bae, 40, head of K.K.R. Asia: Marc S. Lipschultz, 43, who runs energy investments, and Alexander Navab, 46, a senior buyout executive.

At Apollo, Mr. Black’s two top lieutenants are his co-founders, Joshua J. Harris, 47, and Marc J. Rowan, 49. The two worked with Mr. Black at the investment bank Drexel Burnham Lambert before it collapsed in 1990. They started Apollo that same year.

What private equity executives and investment bankers say about the emerging leaders is that, as a group, they lack the founders’ outsize personalities and tendency for conspicuous consumption that at times have hurt the industry’s image.

Having amassed extraordinary wealth, the founders have also become some of the country’s leading philanthropists. In 2008, Mr. Schwarzman donated $100 million to the New York Public Library, whose main building is now named after him. Mr. Kravis recently pledged $100 million to Columbia Business School. Mr. Rubenstein donated $7.5 million this year to help repair earthquake damage to the Washington Monument.

“It takes a certain personality type to be a founder,” said a senior private equity executive who spoke only on the condition of anonymity because he did not want to risk alienating any of the founders.“It’s got its great strengths, but the high profiles and great wealth can keep an unwanted spotlight on the industry. I suspect the new leadership will probably fly more below the radar.”

Still, these younger private equity executives are starting to make headlines for their extracurricular pursuits. Mr. Harris of Apollo and David S. Blitzer of Blackstone led a group last fall that bought the Philadelphia 76ers basketball team for $280 million. Mr. Bae of K.K.R. received attention a few years ago when he led a group that paid $129,000 for a giant white truffle from Italy at a children’s charity event.

A nagging problem facing the big private equity companies is how to retain their top talent when the leaders show no signs of moving on. Some companies, like Warburg Pincus and Advent International, have already made a leadership transition to the younger generation, but the largest ones have not.

“I think a number of these firms do not feel the pressure of having to identify successors,” said Mr. James of Blackstone. “Their founders expect to be in their seats a long time. And that has implications for your up-and-coming talent because there isn’t enough succession at the moment. If the brass ring is too far away, your best people will leave.”

To keep the brass ring near, Blackstone and others have been placing their highly regarded executives in leadership roles as they expand into new businesses and markets.

Last year, for instance, Blackstone moved Michael S. Chae, 43, one of its top deal makers in the United States, to Hong Kong where he now heads the Asian private equity operations. Mr. Blitzer, 42, a Blackstone senior executive, was put in charge of a new multibillion-dollar investment portfolio for the New Jersey state pension fund. The companies have also recruited senior financial services executives from the outside into leadership roles.

A year ago, Apollo brought on Marc Spilker, 47, a former co-head of asset management at Goldman Sachs, as its president. K.K.R. has brought on William C. Sonneborn, 42, a former president of the asset manager the TCW Group, to build a traditional money management arm. Carlyle last year hired as its chief financial officer Adena Friedman, 42, formerly the chief financial officer of Nasdaq.

Four years ago, Blackstone acquired GSO Capital Partners, a hedge fund that invested in distressed debt and other fixed income securities. Today, Bennett J. Goodman, 55, the co-founder of GSO, oversees about $46 billion in credit-related assets for Blackstone. Mr. Freeman, the Barclays analyst, said that while the lack of upward mobility could eventually become an issue, if the founders pick a clear successor, they risk having the also-rans leave.

“If anything, retention is a bigger issue than succession,” Mr. Freeman said.