Helping portfolio companies reach their potential through operational achievements continues to be of the utmost importance to private equity firms. To do so, many firms rely on operating partners, whose time is dedicated to working with portfolio companies to improve business functions and increase value. Today, operating partners are in increasingly high demand at private equity firms.
According to Hiedrick & Struggles, an executive search firm, the operating partner role is the position that has seen the most growth at private equity firms today. Successful operating partner candidates tend to have a mix of experience in consulting and operations with some exposure to private equity. Here are some interesting findings about the operating partner role from Hiedrick & Struggles’ October 2019 North American Private Equity Operating Professional Compensation Survey.
Compensation for the position has risen in accordance with demand. According to the report, 68 percent of respondents received a base salary increase of $50,000 or less in 2019, up from 54 percent in 2016. Forty-six percent of respondents said their base went up about the same amount in 2018 as in 2017, a figure which was double the percentage increase in 2016. Additionally, forty-eight percent of respondents reported receiving a higher bonus in 2018, 77 percent higher than in 2015.
Given the strength in the US private equity market, it’s not surprising that compensation for operating executives has seen growth. The PE industry experienced a robust 2018, with U.S. deals exceeding 4,600 for the first time in history (4,828 U.S. deals closed), according to PitchBook. The value was an estimated $713 billion, the second-highest level ever behind $807 billion in 2007.
Hiedrick & Struggles expects to see further growth of the operating position in 2020. “Our survey shows that the vast majority of operating partner hires—87%—have no prior connection to the investment firms they join. This speaks volumes for the growth of the position,” according to the report.
Investment professionals are busier than ever in today’s competitive atmosphere, which is another driver of the increased need for operating partners. “Investment professionals are spending more time hunting for and closing deals—which means that firms tend to pay less attention to their existing (and growing) holdings. Firms are aware of this deficiency and are increasingly hiring operating executives to address it,” according to the report.
Additionally, operational issues are becoming more complex for GPs, especially the larger and more established firms with multiple funds and an expanding roster of portfolio companies. Combined with limited partners’ insistence on lower fees and greater investment options, this puts extraordinary pressure on GPs to reduce costs and raise efficiencies. The operating executives who can meet these challenges will be in demand, a reality reflected by their compensation.
However, as the PE industry continues to grow, operating partners must work to differentiate themselves. One means of differentiation is the development of hard-to-duplicate niche expertise; 88% of respondents to Dechert and Mergermarket, 2019 Global Private Equity Outlook said operating partner expertise is important to the success of their firms.