Many financial sponsors leverage operating partners as a strategy to generate deal flow, evaluate opportunities, and ultimately run companies. For example, Conor Boden, head of portfolio board development at Advent International, in an interview with Susannah Birkwood of Unquote, said that he believes that the clout of high-profile names often makes a key difference in clinching a deal, noting: “We’ve had cases where we’ve used a well-regarded operating partner in a transaction and the incumbent management team realized that by working with us, they’ll have access to a top-notch chairman”.
SJ Partners, an Axial Member, also maintains a bench of operating partners at the core of their investment strategy. “For SJ Partners, deal sourcing begins with the executive,” says Scott Johnson, CEO of SJ Partners. “This allows us to better understand opportunities and add a tremendous amount of value to our portfolio companies.” In general, operating partners are current CEOs, COOs, or an accomplished ‘CEO ready’ executive operating in an industry throughout their career. They often hail from Fortune 2000 companies and are excited and ready to serve as an active board member or full time CEO.of a nimbler middle market company.
Operating partners play three key roles within SJ Partner’s deal origination strategy.
Leverage their network to generate deal flow.
Using relationships developed over many years, an operating partner has unique insight into companies that would make ideal acquisition targets for SJ Partners. “Eight years ago we invested in a recurring revenue telecom services company. Our operating partner, now serving as their CEO, was a client of the company and saw the value and scalability the company could potentially achieve. In the last eight years, he’s been able to grow the company 10x, driven by 11 add-on acquisitions,” Scott described.
Identifying the key value creating levers in any given company and industry.
Compared to the deal team, the operating partner often maintains a more realistic and informed view of a company. They know the industry best, and will be accountable for achieving the plans put on paper. Operating partners can also provide insight into the feasibility of a buyout and help in determining the purchase price. “I’ve seen some beautifully formatted Excel models, but a model is only as good as its assumptions,” continued Scott. “I would generally prefer to rely upon the assumptions made by the experienced operator.”
Creating Credibility Quickly.
Credibility is a tremendous asset during initial meetings with business owners; operating partners add that credibility. Operating partners demonstrate to the management team that they can talk the talk. “Last week we met with a company who only wants to talk to SJ Partners because they liked our operating partner, enjoyed exchanging industry insights, and, most importantly, see the immense value our operating partner can bring to taking the company to the next level,” Scott said.
While there are lots of advantages in making operating partners part of your investment strategy, it makes it more difficult for investment bankers to know exactly what you’re looking for, because as your team of operating partners changes, so will your investment criteria.
What else are operating partners great at doing and what are some the challenges of working with them? Leave your thoughts and comments below.