In recent years, the highly competitive deal market has shifted the private equity industry’s emphasis away from financial engineering and put pressure on firms to drive operational value growth in their portfolio companies. As a result, operating partners, whose job is to facilitate on-the-ground value creation, have become key components of investment strategy for many firms. But if there is agreement about what operating partners do—they work intimately with portfolio companies to create value—there is widespread disagreement about who makes a good operating partner and what mix of analytical, experiential, and temperamental qualities are predictive of success in the role.
As the primary liaison between a private equity firm and its portfolio company, an operating partner ensures that the portfolio’s executive team has the people, processes, and tools it needs to meet the goals established by the PE firm’s investment thesis. Though the role requires extensive operational leadership experience—the exact requisites vary according to the industry and the expertise gaps in the management team—an operating partner’s essential tools are communicative: They assess, oversee, socialize, and guide the executive team in the execution of its strategic plan. Poor communication can cause schisms between the deal team and the portfolio company, and these schisms often translate into losses. Misalignments about investment thesis, strategy, performance expectations, and timelines can lead—for example—to unplanned CEO turnover, which often negatively impacts internal rates of return, lengthens hold time, and erodes performance and morale.
Portfolio Company CEO Experience
In order to advise CEOs from a position of knowledge, it helps for operating partners to be personally familiar with the experience of running an institutionally backed portfolio company. This is a basic communication-as-empathy paradigm: People who know how it feels to work under a private equity firm’s oversight, implement its investment thesis, follow its timelines, and facilitate its exit are better positioned to guide others through the same process. “Conversely, operating partners without experience working with institutional partners or managing a board may struggle in the role. Quite simply, former portfolio CEOs now working as operating partners probably know what it’s like to be on the receiving end of poorly communicated plans or unreasonable demands, and this memory can inform their ability to set realistic expectations among the investment team, carefully socialize strategic changes in the portfolio company, and, most importantly, adapt both expectations and strategy to continually reflect on-the-ground realities.
The ability to come in and quickly establish rapport with a CEO and senior management team is critical for an operating partner. The best way to do that is to demonstrate that you’ve sat in their seat before, had success, and are willing to listen to them.
Furthermore, most companies prepare annual budgets and historical financial statements. While critical to operating the business, they aren’t enough to fully capture the intentions and plans for the company. Preparing an annual written plan that is shared with top management and employees and updated quarterly is critically important, especially for smaller, fast-growing companies.
The negatives? As mentioned, former CEOs may need to adapt to a new change methodology, learning to lead by persuasion rather than by directive. Also, operating partners travel rigorously, and it can be difficult to coax former CEOs to embrace this schedule. At the same time, PE firms should avoid bringing on late-career “back nine” operating partners who are protective of their leisure time. The role is demanding and it’s not for everyone.
Consulting Experience
Even if this skill has to be dusted off before use, operational executives who have experience (however distant) in management consulting tend to be quite good at making the transition from an executive to an advisor.
Consultants are generally skilled at selling difficult advice to their clients. Also, current or recent consultants will better acclimate to rigorous travel schedules. Of course, the ideal operating partner candidate will possess management consulting and portfolio company CEO experience; however, former consultants without private equity or portfolio company backgrounds can learn to excel in the operating partner role as long as they have experience as an operational executive; they may, however, require an adjustment period.
The most successful operating partners our we provide for our clients understand that they’re not there to run the portfolio company themselves, but rather to work with, mentor, and influence the management team. We’re not looking to turn CEOs into general managers. Thus, an ability to work collaboratively with an existing team is imperative to being a successful operating partner.
Board Experience
Current or former board experience is a great indicator of success in the operating partner role. How productive the candidate was in both board [and consulting] roles are incredibly important. Seek validating data points that CEOs have received valuable contributions from the candidate and their relationship was authentic and beneficial.
There are several reasons for this. First, operating partners with board experience have the experiential tools to help newly minted portfolio CEOs navigate the nuances of interacting with and reporting to the company’s board. Second, board members come with a Rolodex of valuable connections to talent, mavens, other businesses, and potential customers. Third, board members and operating partners tend to share a set of key skills.
- Good board members look beyond the executive horizon to chart their company’s longterm strategy while at the same time monitoring and advising the company’s day-to-day operational team. Operating partners need to demonstrate the same kind of bifurcated thinking, facilitating tangible and timely change in their portfolio company while also considering the long-term trajectory of the private equity firm’s investment.
- Board members, like operating partners, are tasked with assessing their executive team, ensuring that the CEO and management have been fully briefed on the firm’s strategy, that they have the skills and inclination to implement it, and that they do so in an efficient and effective manner.
- Successful board members and operating partners tend to be proficient in communications-based leadership styles. Unlike turnaround executives, whose decisions are implemented down a defined chain of command, board members and operating partners must take softer approaches. Their job is not to yell in the executive team’s ear but to whisper—effecting positive results through persuasion, change socialization, and consensus.
You can think of an operating partner as the mid-point between the CEO and a board member, so board experience is key.
Conclusion
If you’re looking for a new operating partner, be patient. Finding the right one takes time. And even the best candidates sometimes require a brief learning period. In looking for an operating partner with CEO, board, or consulting experience, it’s important to reference extensively. You want to get a good idea of how effective the candidate was in these roles. For former consultants and board members, you want to see that CEOs have received valuable contributions from the candidate. For former portfolio company CEOs, you want to see how successfully they applied the strategies suggested by their private equity backers.
Value Driven Solutions 360 client alignment® measures beyond current core competencies to look at a potential operating partner’s learning methods and the time that it will take them to fully develop into the role.
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