Hedge funds face key man risk

Despite current investor and media attention on unexpected CEO turnover at major public companies, key man risk – the risk that the departure of a key executive or group of executives will lower credit quality – is more prevalent and a risk to credit quality among private equity firms and hedge funds, says Moody’s Investors Service in a new report.

 

Like other firms with founding CEOs, hedge funds and private equity firms face key man risk because they have often been created by successful founder executives who have played a central role in building a franchise and are closely linked with its business, brand and success. However, unlike most other major companies, these firms face additional key man risk because one or a handful of investors may hold most, if not all, of the voting stock.

Generally speaking, older firms will be more likely to have their equity distributed away from their founder, while private equity firms are less likely than hedge funds to have a single owner.