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Business Owners

The Rise of the Private Equity Operating Partner


While private equity as an industry still has a reputation for relying on financial engineering when investing in a company, the last decade has seen firms become much more focused on ways to grow their portfolio companies through operational improvements.

As financial sponsors increasingly focus on this strategy, the “Operating Partner” has become a much more prevalent role at firms large and small. While the majority of senior executives at a firm are transactional in nature, Operating Partners are typically proven business leaders whose focus is accelerating the value creation of portfolio companies and playing an active role through the lifetime of a given investment.

Operating partners integrate themselves fully within a platform investment, often taking on the role of an active chairman. They spend a significant amount of time on-site, work closely with management teams, give high-level guidance, and help to identify and implement growth strategies, involving themselves in the day-to-day operations of a company.

Dedicated Resources

There are a couple of ways firms add to dedicated resources focus on the operational side of an investment. While some private equity firms bring on Operational Partners as full time employees, with the same standing as those running the deals and a stake in the fund, others use in-house consultants, bring on senior advisors/board members, or tap external resources (consulting firms, industry-specific professionals) to play the same role.

Terra Firma, a well-known UK based private equity firm, is one example of a successful fund that values having both the financial and operational focus in each of their portfolio companies. When engaging with a company, the firm assigns one Managing Director (typically a former CEO) and one Financial Director that stays with the company for the lifetime of the investment.

Leaner funds often have no choice in ensuring every partner assumes both a financial and operational position when identifying, buying and managing a company.

Three Models

There are three common models a private equity firm follows when taking the operational route. In a paper from INSEAD, the industry expert model, functional model and generalist model are laid out.

PE Operating Partner Image

Source: INSEAD

Before the Deal

One of the most significant roles for an Operating Partner actually takes place before a deal closes. During the due diligence phase of a transaction, an Operating Partner will step into the light, spending time to vet the company and any potential operational weaknesses.

Playing Coach

While some private equity acquisitions result in leadership changes, studies have indicated that replacing a CEO may increase the time it takes to generate stronger business results. Alternatively, many firms take the approach of supporting the existing CEO, with the operating partner frequently acting as the top executive’s coach.

It’s important that Operating Partners build a foundation of trust with a CEO, allowing an executive to still exercise independence in running his company and aligning with the values and culture upon which a company has been built. Many Operating Partners have been owners or operators of companies themselves, come from consulting background or have specific expertise in a given area, for example, IT, HR, marketing, purchasing or manufacturing. Taking the approach of augmenting a CEO’s strengths or filling in for areas that need extra attention gives a CEO the feeling of cooperation and collaboration versus that of losing control.

Sample Due Diligence Checklist

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