While the value of a central operations shared-service is universally understood, its look and feel still varies from firm to firm. There are probably several factors that contribute to this: the role of the operating partner is relatively new and they are still figuring it out, the private equity industry hasn’t universally agreed on what an operating partner is, each firm has different needs and the role of their operating partners changes to match. Whatever the reason, a recent panel between The Carlyle Group, TPG,Terroir Capital, HIG Capital, and several others, concluded that the role of the operating partner is: 1) difficult to define, 2) critical to the due diligence process, and 3) 50/50 strategic advisor, business manager. So what do Operating Partners face? Let’s take a look.
1. Tough to define
After existing for 10+ years, the role of a private equity or venture capital operating partner is still hard to define.Each firm has different styles, expectations, and goals for their operating partners and so the role itself adjusts. (Still unsure of what an operating partner is? Here’s what you need to know) Some firms view operating partners as portfolio company CEOs, others see them as strategy consultants. Despite subtle differences, you can categorize the various types of operating partners into 3 main categories.
The Functional Expert: These operating partners are former executives, strategy/accounting consultants, or lawyers with a deep functional expertise and experience working within businesses experiencing similar growth patterns
The Industry Expert: These operating partners are industry-specific former senior executives, (typically CEOs or CFOs, or senior-level general managers) who have operated in the spaces that the firm invests in and fit the firm’s overall investment strategy.
The Generalist: These operating partners are the least common. Former consultants, often complemented with a few years of relevant industry experience.
Most often however, firms use some sort of hybrid model, adapting their strategy to fit the needs of their companies. This can include a mix of sector experts(manufacturing, financial services, lending, retail & ecommerce, and others) and functional experts (strategy, finance, talent, supply-chain, etc) who partner on different engagements across the portfolio. Confused? Hard to blame you.
2. Critical to due diligence, but tight on time
Private Equity firms use operating partners early on to get a running start on the due diligence process, but it’s important to understand that time spent on the deal diligence is time not spent on improving current portfolio company performance. In fact, the due diligence portion of a deal should only take up 5-10% of an operating partner’s time. Too much longer and they won’t be able to do what they were hired to. No matter how much you want to look at the shiny new business you can fix, be sure to focus on the ones you already have. Rebuilding business operations takes time and attention, so make sure you have the bandwidth to give both.
3. 50/50 strategic advisor, business manager
Depending on the firm, some operating partners must have a board seat at whichever company they are assisting. It becomes part of the required institutional strategy. Holding such a seat can give the operating partner a deeper view into the overall business strategy and control over the direction, but it also places a lot of stress between the operating partner and the executive team. Navigating the operating partner dynamic is one thing, navigating the board member dynamic on top of that can be even trickier. For this reason, some firms don’t give operating partners board seats, insisting that the advisor relationship is far more effective than the governing relationship. And of course, as you can probably guess, some firms mix it up depending on the circumstances. From the perspective of the operating partner, sitting on a board is often preferred to not, as holding a board seat changes compensation.
Any time you step into a newly created role or a type of role that hasn't been around for a long period of time, there are going to be growing pains. For those of you who thrive under pressure and constant change, this will be a dream role. Others who need stability and consistency should stick to working as an operator within companies, as this will prove a difficult transition for them.
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