By Nivine Richie
Key man risk, or key person risk, is the reliance on one or few individuals in the firm such that their departure will significantly impact the future of the business. The infographic below discusses factors that influence key person risk.
But before we look at the infographic, here is an example of this risk from a famous departure of a "key man" in the investment management industry.
Bill Gross is the famous bond investor that left the Pacific Investment Management Company (PIMCO). From the Fitch Wire in 2014:
Fitch Ratings-New York-03 October 2014: Active asset management firms that rise to prominence on the strengths and reputation of powerful investment managers invariably face the risk of these managers' departures. Bill Gross' exit from Pacific Investment Management Company, LLC (PIMCO) one week ago has made for one of the starkest case studies of why key man risk should not be underestimated as a critical assessment factor in investment manager and fund ratings, according to Fitch Ratings.
Key man risk is not uncommon in the investment management space, typically arising when an investment management company becomes heavily reliant on a single person or a few key individuals, often the founders. We also see many alternative managers as exposed to the risk.
PIMCO, in spite of its large size, diverse number of products, established processes and solid ownership backing, was still heavily influenced by a single person, who was also its founder and most visible chief investment officer. While PIMCO has evolved to a point where its operating and governance infrastructures served to alleviate key man risk, Gross' stature as a driver of the firm's success also drove the magnitude of the risk of negative response to his exit.
A key individual's exit can cause a material outflows, disrupt the organization's future business prospects, damage its franchise and potentially support a competitor. For PIMCO, outflows thus far have not been material enough to raise serious concerns for the financial health of the company, given its continued AUM scale and diversity, and the background and expertise of the remaining management team.
You must be a registered user to add a comment. If you've already registered, sign in. Otherwise, register and sign in.