What's a Private Equity Operating Partner and how can you become one?
Maybe you have a friend who made this career shift in the past, or perhaps you noticed someone's profile and thought “Hey that looks like a sweet gig!”. Regardless, your interest was piqued and you want to know more about becoming an Operating Partner for Private Equity and/or Venture Capital firms. Here is an overview of what an Operating Partner is, what they do, and what salary they can expect to be paid.
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An operating partner is a term used by VC firms and PE firms to describe a role dedicated to working with privately held companies to assess their value during the due diligence process and create gameplans for improving their weak areas post-investment. The leverage specialized skills honed over a successful career to make material impacts at the fund level. So in short, there are two types of Operating Partners.
Operating Partner at a Private Equity Firm
Normally an accomplished executive with a long track record of Operations, CEO/General Management, Finance/Audit, or Human Resources experience. These professionals will get involved on due diligence and serve as interim leaders at portfolio companies when the private equity firm first invests. They will also oversee the recruitment of the fulltime person.
Operating Partner at a Venture Capital Firm
More of an advisor than an operations person, so the name is actually kind of misleading. These people will usually be former founders, technology executives (like the recent trend of Chief Revenue Officers), or well-known industry names. They will usually focus the majority of their time at the venture capital firm itself and be an "on-demand resource" for the portfolio companies.
As mentioned above, operating partners perform a variety of services aimed at improving the performance of a struggling and/or developing business and usually sit as a member of the senior management team. Private Equity or Venture capital firms will have an entire team of functional experts ready to be deployed into their portfolio companies to assess and coach their leadership teams as part of a broader transformation strategy.
These experts will have extensive backgrounds in things like Digital Transformation, Finance & IPO readiness, Marketing & PR, Talent Development & Acquisition, and the list goes on. These backgrounds will shift depending on the needs of the portfolio company.
To the companies who receive investment from private equity or venture capital firms that leverage the operating partner model, imagine having on-demand support from an expert in one of the previously mentioned functions to support your team and guide you through complex challenges that your leadership team lacks the experience to solve.
What's the difference between an operating partner and Venture Partner?
Venture partners lead the core deal team of a VC firm. They are responsible for the sourcing of and managing of the firm's overall deal flow and investment strategy, and manage the firm's investment team. An Operating Partner is responsible for working with the current portfolio companies and assisting the founding teams in their day-to-day operations.
So it is easiest to remember it like this: Venture Partners bring the companies in, and Operating Partners take care of the companies once they are there.
Here's a more detailed overview:
While the value of a central operations shared-service is universally understood, its look and feel still varies from firm to firm. There are 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. The role of Operating Partner is 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. 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 groups.
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. These people will have deep ties into the functional executive network they are a part of.
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. These people will have deep executive networks across the industry to tap into.
These operating partners are the least common. Former consultants, often complemented with a few years of relevant industry experience. These people will have broad and utility based networks to tap into made up of a variety of executives from different backgrounds.
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 serving as board members changes compensation. Read more on how board seat compensation breaks down.
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.
It's important to know if you are going to consider this shift that there is a difference between leading and influencing. Many successful executives who are proficient leaders believe the skillsets transfer easily, but all too often those same executives are wrong. As an Operating Partner, your role is to influence the executive teams and provide expert opinion, that’s it. To be successful, you must be ok with not being the one in charge as that is rarely the reality.
The role of an Operating Partner is much more closely aligned to being a coach & adviser, often offering recommendations and pushing forward subtle changes, than the person leading the charge. If that appeals to you, then great! You will find these roles to be both challenging and fulfilling; however, if you are someone who needs to hold the remote and choose the channel, you may want to reconsider.
Do Operating Partners travel a lot?
Yes. The role of these partners requires them to be on the ground implementing change. Often, these executives are parachuted into businesses on a 3-6 month basis, spending 4-5 days on the ground until the project is finished and you’re off to the next one. They need deep executive networks and the only way to grow that is to spend the time meeting new people.
Some find it to be like an adventure and some feel the strain of being constantly on the move. In reality, your likes/dislikes will decide which group you fall into. Also, your desire to travel may change depending on where you are in your personal life. If you are at a later stage and your kids have left the nest, this may sound very appealing to you.
Compensation levels vary greatly depending on the size of the firm you are working for and whether or the firm is a Venture Capital firm or Private Equity, but on average you can expect to be paid a base and bonus that is in line with your market value in-house at a company of a similar size. In addition, the breakdown of salary, bonus, and equity will also be similar.
That alone may not be exciting for most of you, but the big cherry on top of salary, is the participation in Carry or Carried Interest, which is a person’s share of profits from a particular investment. Like Options or RSUs, Carry may not pay out large sums immediately, but given time and a bit of luck, it can generate a life-changing payday.
Here is a chart showing the average split between Operating Partner compensation levels. You will see a breakdown of Operating Partner Salary, Bonus, and Equity in terms of relative breakdown.
This high risk/high reward form of compensation can create true “quality of life” changing payouts; however, they can also amount to nothing after years of hard work. When deciding whether or not this life is right for you, we would advise you to work under the assumption that Carry will likely never come to fruition. That way, it is always this amazing nice to have, and never something that your current lifestyle depends upon.
The role of a Private Equity Operating Partner (or Venture Capital Operating Partner) is one of constant change and excitement where no two days are typically the same. If this sounds like something that would appeal to you, then your best way of breaking into this coveted space is to reach out directly to the investment partners and make your case as to why you would add value to their portfolio.
If the constant change and unknown doesn’t appeal, then rest easy knowing there are always opportunities to continue down the path you are on. Just because a job sounds interesting, doesn't mean it it the right job for you. The path towards in-house C-Suite executive can be just as rewarding.
Is working in PE as an Operating Partner worth it?
For the right person? Absolutely. It can be a uniquely challenging and rewarding role that allows you to flex different muscles and get your hands into various businesses that you may not have been exposed to otherwise.
What makes a good Operating Partner?
In short, the right balance of analytical thinking with creative problem solving. You need to be able to think fast on your feet and work with different personality types. A Private Equity Operating Partner will also need a deep executive network.
How do Private Equity Operating Partners get paid?
Private Equity Operating Partners will be paid a mix of cash compensation and LTI (long-term incentive) usually in the form of carry, or carried interest (equity in the fund or individual investments that pays out when a business is sold).
What is the difference between a Partner and Operating Partner?
As stated above, the partner focuses on the deal flow and portfolio investments, the operating partner focuses on optimizing the investments once they are in the firm's portfolio.
Is an Operating Partner an owner?
No, an Operating Partner is an agent of the fund they work for. They do not normally own the businesses they work within unless they choose to coinvest (very rare with this deal size) or have carried interest in the fund itself.
Do Operating Partners charge fees?
No, companies leveraging their investors' Operating Partners will not be charged a fee. The work they do is covered by whatever compensation package they agreed to with the VC or PE firm.
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Private Equity International, The Operating Partner of Tomorrow, October 2020
Investopedia, What is Carried Interest, April 2020
Business Insider, What is a Venture Partner, August 2010
George is the CEO & Co-Founder of The Suite. He founded The Suite in order to fundamentally change the way executives manage their careers. Prior to founding The Suite in 2019, George spent several years in the executive recruiting space where he was fortunate enough to advise some of the world's leading VC & PE backed businesses on talent.