Succession: what private equity can learn from Clessidra The crisis the Italian firm has faced illuminates an industry-wide problem.

4 May 2016 | Written by Hannah Langworth, Real Deals

It could almost be the plot of one of Italian cinema’s famous melodramas. Claudio Sposito was born in Rome in 1955, trained as an architect, then moved into finance where he was dubbed “a whizz-kid banker” by the Economist, spending ten years as Morgan Stanley’s head of Italian investment banking activities and chalking up stints at Barclays, Citibank and Standard Chartered. 

After going on to supervise the IPO of the Berlusconi family’s media group Fininvest, he founded Clessidra Capital Partners in 2003 and over the next decade built it into one of the Italian market’s top private equity firms.
With a widely envied network of contacts in Italian business and an ability to write cheques much bigger than most others in the market, Clessidra backed high-end jeweller Buccellati in 2013, flamboyant clothing brand Roberto Cavalli in 2015 and, alongside global giants Advent International and Bain Capital, took over banking group ICBPI in a multibillion euro deal last June. 

Alongside these headline-grabbing transactions, the firm also made a steady series of investments in Italy’s strong industrial, manufacturing and food and drink sectors.

It wasn’t always la dolce vita, though. Clessidra made no investments between 2009 and 2012 and had to cut a planned fundraise from €1.4bn to €1.1bn in 2013 after investors voiced concerns about the firm’s ability to deploy capital. 

But it could be argued that these difficulties stemmed from the global financial crisis and the consequential impact on Italy’s economy as a whole. By 2015, Clessidra was in the market again and, as reportedly one of the most popular firms in Europe with investors, seemed firmly on track for a successful raise and further blockbuster investments.

Sposito’s sudden death in January 2016 after a short illness changed everything. Without its founder and leader, Clessidra found itself with its key man clause breached, its fundraising effectively put on hold, and its future uncertain, as Sposito’s widow tried to dispose of her late husband’s 79 per cent stake in the firm.

Talks with new chair Francesco Trapani fell through in March after the parties failed to agree satisfactory terms. Following this news, a deal with an external investor looked like Clessidra’s only option for any kind of swift resolution. Coller Capital and Neuberger Berman were mentioned in the market as potential buyers, but at the time of writing it appears that Italian financial conglomerate Italmobiliare will prove the firm’s saviour, having entered exclusive negotiations to acquire 100 per cent of the GP. 

This or any other deal will, however, be conditional on a potential investor’s confidence in the stability of Clessidra’s current team. The departure of two partners this month, and rumblings that others might follow, throws this into doubt.
“It would have been easier if the firm could have come to a solution internally rather than having to go into a sales process,” says a GP familiar with the Italian buyout market. “It’s tough. Where do they go from here? [An external deal] looks like a possibility. But it will all depend on the price and making sure that the team will stay on.”

A deal will also be dependent on the confidence of a potential new investor that Clessidra’s team can continue to raise and deploy money. The firm is thought to have raised €500m and reached a first close of its new fund, but commentators agree that to all intents and purposes this process remains in limbo until the ink on any deal is dry and, as one placement agent points out, all commitments made so far can be regarded as effectively cancelled thanks to the key man clause breach caused by Sposito’s death. 

In addition, Clessidra was until very recently a beneficiary of the shift in the LP community towards a preference for fewer, stronger relationships with premier GPs. But now it faces the flipside of this trend and the fact that there are a number of other Italian firms that, if smaller in scale, still offer investors attractive exposure to an Italian economy that is strengthening and remains underpenetrated by buyout investors. 

The prospect of future deployment by Clessidra, meanwhile, comes back to the success or otherwise of this current fundraise as Fund II, closed back in 2009, is nearly exhausted.

“This a good firm with a strong brand. They should be back to business as normal once the sale is finalised,” says one GP who has invested in Italy. Others in the market are less optimistic. 

And even though Italmobiliare’s interest is ostensibly good news for Clessidra, it is worth noting the investor’s references to “strengthen[ing] [Clessidra’s] management structure” and “contributing [Italmobiliare’s] own industrial management vision”.

This suggests that Clessidra’s team, identity and way of working may all be up for debate once the firm and its assets are the hands of its new owners.

What went wrong at Clessidra 

“Clessidra, the Italian word for ‘hourglass’, the ancient instrument that measures time with the constant flow of sand, reflects Claudio’s belief that value is created over time,” reads Clessidra’s website. Unfortunately, without Sposito, it appears that value is also at risk of flowing away very quickly.

“This is a good example of the perils of not doing proper succession planning,” says Sunaina Sinha, managing partner at Cebile Capital. Commentators agree that Clessidra’s current difficulties stem from the firm’s failure to build an institutional identity and infrastructure that could operate confidently in the absence of its founder.

“The succession issue has been a difficult one [for Clessidra],” says one GP familiar with the Italian buyout market. “Claudio Sposito was such a respected and charismatic leader and it was always going to be difficult to follow him.” 

Rupert Bell, principal consultant at Private Equity Recruitment, describes Sposito as a “a very senior and successful investor”, and adds that “mid-market firms are often built in the shadow of one particularly strong leader” so “for all that people talk about equality of partners”, they can find themselves in “an Animal Farm-type situation, where some ‘animals’ are much more ‘equal’ than others. And when a person like that disappears, that exposes certain structural weaknesses.”

The problem is worsened by the fact that not only had Sposito not anointed a second-in-command and heir clearly enough, but that the main candidate for this distinction, Trapani, is widely seen as an outsider to the firm and the industry itself. He joined Clessidra in 2014 as an operating partner after a career with his family’s jewellery and watch business Bulgari and then at luxury group LVMH, which bought Bulgari in 2011.

“It was silliness to identify a successor who wasn’t really one of them,” says one person familiar with the Italian private equity market. "Why bring in a ‘foreigner’? It’s a complex enough situation.” 

One Italian GP commenting on Trapani’s appointment says that in private equity “it’s a completely different situation when you create and develop a team to when you come in later as the boss”, while another dealmaker familiar with the market thinks that “it must be tough for Trapani, who only joined around two years ago, to step into those big shoes and maintain the spirit of the firm, especially in such sad circumstances”.

Others lament the fact that Clessidra did not take sufficient precautionary steps in 2015 once the imminent coming of the sad situation it was shortly to face must have become clear. 

“As soon as Claudio knew he was ill, a full transition process should have been put in place”, transferring leadership and also ensuring Sposito’s shares would be sold at a good price and in a way that would enable the business to continue with minimal disruption, says Giacomo Biondi Morra di Belfort, managing partner of Capstone Partners. 

He adds that he thinks that doing so, even late in the day, could have avoided what have been difficult and prolonged negotiations around Sposito’s interest in the firm.

A time bomb for the private equity industry

It is worth noting that the situation faced by Clessidra in recent months came to an organisation widely regarded as strong and resilient. “The firm was well-liked by investors and had good deals and a good bench,” says Mounir Guen, chief executive of MVision. “I would not have predicted this for Clessidra.”

In this light, any private equity firm under the assumption that its organisation is not at risk could be in for a rude awakening. The importance of planning well for succession is not an issue just for Clessidra or Italian investors, but applies across the buyout industry.

“A lot of firms do not do as good a job as they need to do to make sure that there is a good succession plan in place,” says Sinha. 

Caroline Sage, chief executive of KEA Consultants, sees the issue as one inherent to the way firms were created and have grown, often focused around strong characters reluctant to cede control. 

“For quite a while,” she says, “people who founded funds saw themselves as investment vehicles and not companies, so very little was done around culture or retention [of promising junior staff].” She adds that many firms, especially smaller ones, are still not doing enough to address this.

Bell sees the issue as nothing short of a time bomb for private equity, given that many founders and senior figures are approaching retirement age. Looking on the bright side, he adds that succession can be an opportunity as well as a risk. In the current environment where many GPs are struggling to stand out in a crowded, competitive market, having a good succession plan could come to be a valuable differentiating factor.

How to future-proof your firm

“Write a will,” is one placement agent’s succinct advice to firms hoping to avoid Clessidra’s fate, or to use future-proofing. “As a firm whose business is assessing risk in target investments,” says Bell, “you need to apply that discipline to yourself, otherwise you run the risk of losing everything, not least the support of your investors.”

The first practical step firms should be taking when considering succession is simply discussing it because, Bell says, even “having it as a non-taboo subject” can be tough for some houses where “there’s so much influence and control with one individual that even asking the [succession] question seems like an internal challenge, which needn’t be the case”.

A crucial further step is to put time and effort into supporting the next generation. “You need to have a sense of a developing second tier management coming through with the incentives and rewards to structure that not just for two years but for two fund cycles,” says Bell

This point is particularly prescient given that a working paper published this month by Josh Lerner and Victoria Ivashina of Harvard Business School found that fund economics are typically weighted toward founders, with the individual performance of more junior partners having little influence on remuneration. 

In addition, it is neccessary for LPs to become comfortable with the idea of a changing of the guard. “If they are still totally bought into the founders, and that’s why the money comes in every time they fundraise, then that’s one thing that you have to tackle first, passing over relationships and that belief,” says Sage.

Ultimately though, Bell thinks the issue is philosophical as well as practical. Successful succession planning is about “a certain forward-thinking mentality, or a generosity of spirit, or just having a diversity of other interests beyond the business [that enables some founders] to say: ‘I’ve built something interesting and it’s now time for this to move on without me.’" 

"They may keep their name on the letterhead, turn up for investment committee meetings, or preserve a mentoring influence, but they recognise that if the firm is to have a future they have to enable that by creating space for the people behind them,” he says. 

But, in Bell’s opinion at least, it is unfortunate for private equity that when it comes to the industry’s big characters, “this is not how many of them tick”. 

By Hannah Langworth, Real Deals

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