Understanding the Role of an Operating Partner in Business

An operating partner is a crucial member of a private equity firm, responsible for hands-on involvement in portfolio companies. They help drive growth and profitability.

Operating partners bring significant industry expertise to the table, often with 20-30 years of experience in their respective fields. This expertise is invaluable in guiding portfolio companies through challenges.

Their role is not limited to providing guidance; they also help identify and execute strategic initiatives to drive growth and increase value. This can include hiring key personnel, implementing new technologies, or restructuring operations.

In essence, operating partners act as a bridge between the private equity firm and the portfolio company, facilitating collaboration and driving results.

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An operating partner is a key player within investment firms, particularly in private equity and venture capital.

They are usually seasoned executives with experience in specific industries or functional areas like supply chain, marketing, or technology.

Operating partners are proven business leaders, functioning as either generalists or specialists, and have successful track records of creating value in operating companies.

They are more capable of developing strategies and leadership teams than a deal-oriented partner.

Most operating partners have a background as CEOs, COOs, CFOs, chief revenue officers, management consultants, or have market knowledge of PE, such as deal structuring, in the investment firm's target industries.

They focus on due diligence, strategic planning, commercial growth, operational efficiency, and financial controls.

An operating partner plays a crucial role in the investment cycle, spanning from due diligence to post-transaction integration and eventually leading to a liquidity event or full exit event. They are deployed by investors and boards to act as a catalyst for change, coaches, or mentors, and in some cases, to serve as "sparring partners" for management.

Their role is multifaceted, involving managing short- to medium-term as well as long-term operational improvement programs for portfolio companies. They may also support management in day-to-day operations, as interim management, as board members or observers, and/or as advisors.

An operating partner's role should not be confused with that of a venture partner or an entrepreneur-in-residence. A venture partner is a non-salaried external resource who sources deals and plays a significant role in a few or more companies over the life of a fund, receiving salary and equity interest directly from the target company.

Here are the key responsibilities of an operating partner:

In the early 2000s, the operating partner role began as a tactical position focused on financial restructuring and operational efficiency, primarily used in turnaround scenarios and to stabilize underperforming companies.

In today's competitive market, the role of an operating partner has become more critical than ever. Traditional financial engineering is no longer enough to secure high returns.

The presence of an operating partner can be a deciding factor for investors when choosing a firm. Their expertise helps in mitigating risks and seizing growth opportunities.

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Investors now look for tangible, operational improvements to create value. This is where operating partners come in, bringing a practical, action-oriented perspective.

Operating partners bridge the gap between high-level strategy and day-to-day operations, making sure that investment firms can achieve sustainable growth and profitability.

Their strategic insights are invaluable in industries facing rapid technological changes and evolving consumer demands.

Collaboration between the operating team and portco management is essential to unlocking value. A functioning collaboration between the firm and portco is necessary to achieve the end goal.

Operating teams are now spanning the deal life cycle, from diligence through exit, and providing support across the value creation levers – growth, cost, and risk. Since 2010, 47% of value creation has come from operations, up from 18% in the 1980s.

The operating partner role now involves working closely with portco management, providing strategic insight and advice, and supporting board initiatives. Many industry leaders in dealmaking know that there may be no winding back of the clock to a time when inflation wasn’t a major factor and interest rates were low.

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Business development is a critical focus for private equity funds, and operating partners play a crucial role in helping portfolio companies secure new business. This support can take various forms, such as dedicating a team member from the fund to assist with sales or assigning an operating partner with a robust industry network.

Key areas of collaboration include:

Private equity firms are shifting their focus to operating teams, recognizing that traditional financial engineering is no longer enough to secure high returns.

In today's market, investors are looking for tangible, operational improvements to create value, and operating partners are playing a critical role in this effort.

Since 2010, 47% of value creation has come from operations, up from 18% in the 1980s, highlighting the growing importance of operational improvements.

Industry leaders are adapting to the new macro conditions, recognizing that there may be no winding back of the clock to a time when inflation wasn't a major factor and interest rates were low.

Operating teams are now expected to provide support across the value creation levers - growth, cost, and risk - and are seen as a key differentiator for private equity firms.

To meet these demands, operating teams are being transformed to provide strategic insight and advice, support board initiatives, and even step in to help portfolio companies execute their value creation plans.

Here are some key areas where operating teams are making a significant impact:

By highlighting their operating team's strengths, private equity firms can differentiate themselves in the market and attract investors who are looking for tangible, operational improvements to create value.

When building a team, one key decision is whether to hire a full-time or part-time Operating Partner. The full-time model is most effective for complex turnaround situations or firms with a strong operational focus.

Having a comprehensive view of the company's operations and long-term goals is crucial in these situations, and a full-time Operating Partner can provide that.

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Part-time Operating Partners, on the other hand, are typically engaged on a project basis and have more flexibility, allowing them to contribute their specialized skills as needed.

This model is often used to fill temporary gaps in expertise or to provide targeted support in areas like digital transformation, supply chain optimization, or product strategy.

Part-time Operating Partners might work with several firms simultaneously, offering their insights and support without the firm needing to commit to a full-time hire.

Internal teams have the advantage of understanding the firm's broader strategic goals, fostering better communication and alignment with investment teams.

Internal Operating Partners are hired directly by the private equity firm and are considered part of the internal team. They are closely aligned with the firm's investment thesis and play a key role in executing the firm's strategy across the portfolio.

Internal models allow for greater consistency, which can be particularly valuable for firms with a focused sector strategy or a need for operational consistency across a large portfolio.

External Operating Partners are brought in on an as-needed basis and are usually industry veterans or functional experts. They bring an outside perspective and specialized knowledge, which can be invaluable when addressing niche challenges or exploring new market opportunities.

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Operating Partners often face significant challenges in their role, which can hinder their ability to provide meaningful support to portfolio companies. One of the most significant challenges is gaining buy-in from portfolio company executives, who may view Operating Partners as outsiders.

Operating Partners must strike a delicate balance between offering high-level strategic guidance and being directly involved in day-to-day operations. Being too hands-on can undermine the authority of the portfolio company's management, while staying too detached can result in a lack of actionable insights and missed opportunities for operational improvements.

Here are some common obstacles Operating Partners encounter:

Resource constraints and time management are significant challenges for Operating Partners, who often have multiple portfolio companies under their purview. Limited bandwidth can hinder their ability to provide the depth of support needed, especially during critical inflection points such as turnarounds or rapid scaling phases.

Establishing trust with portfolio company leadership is critical to overcoming resistance and driving alignment. Operating Partners should focus on relationship-building early on, demonstrating a willingness to listen and understand the existing business dynamics before proposing changes.

Operating Partners play a diverse range of roles depending on the firm's strategy and the needs of their portfolio companies. They can take on roles such as interim CEO, COO, or other executive positions within the companies, providing hands-on guidance and support across all operational areas.

Full-time Operating Partners are deeply integrated into the private equity firm and often work exclusively with a select number of portfolio companies. This continuous involvement allows them to shape strategy and influence company culture directly.

Private equity operating partners play a crucial role in governance by leveraging their industry experience to provide valuable insights and guidance. They collaborate with the board to set ambitious yet realistic goals and ensure the management team is equipped to achieve them.

Thoma Bravo's acquisition of Instructure in 2020 illustrates this approach. Thoma Bravo strategically added experts to Instructure's board, providing the strategic insights and operational know-how necessary for the company's success.

There are several models that private equity firms use to deploy Operating Partners, and each has its own advantages and disadvantages.

The full-time Operating Partner model involves deeply integrating these professionals into the firm and having them work exclusively with a select number of portfolio companies. They may take on roles such as interim CEO, COO, or other executive positions within the companies, providing hands-on guidance and support across all operational areas.

In contrast, the consultant-based model brings in Operating Partners on a contract or consulting basis, allowing for flexibility and the deployment of the right expertise at the right time. However, this model can lack the continuity and deeper understanding of the portfolio company's long-term strategy.

The choice between these models depends on several factors, such as the firm's operational strategy, the complexity of the portfolio company's challenges, and the resources available.

Here are some key differences between the full-time and consultant-based models:

Decision Making Authority is an important aspect of private equity governance. Operating Partners have a significant influence on operational decisions within portfolio companies.

They collaborate with the board to set ambitious yet realistic goals and ensure the management team is equipped to achieve them. This is evident in the way Thoma Bravo strategically added experts to Instructure's board, providing the strategic insights and operational know-how necessary for the company's success.

Operating Partners do not typically make investment decisions for the fund, however. GPs have the ultimate authority over investment choices and fund management.

In fact, GPs are responsible for making decisions about which investments to pursue. This is a critical aspect of their role in overseeing the fund's performance.

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To become an operating partner, you typically start your career in management consulting or senior roles within large corporations. This is where you can develop strategic planning and operational improvement skills, which are essential for this role.

Many operating partners transition into this role from industry-specific backgrounds, such as tech or manufacturing, bringing a depth of knowledge in their respective fields. They may also come from a consulting background, like Bain or McKinsey.

Operating partners often find their way into private equity through networking and relationships built over years in their industry. They become attractive candidates for these pivotal positions as they prove their ability to enhance business operations and drive growth.

In the food industry, operating partners might become directors of food and beverage or restaurant general managers. They may also transition into roles like owner/operator or director, or become vice presidents or presidents and chief operating officers.

Here are some common career paths for operating partners:

The role of Operating Partners is evolving rapidly due to shifts in market dynamics and increased competition. Operating Partners are becoming more integral to investment strategies, particularly in private equity and venture capital.

Sector specialization is on the rise, where Operating Partners bring deep expertise in specific industries like healthcare, technology, or consumer products, allowing them to identify unique opportunities and address challenges.

Advanced analytics, AI-driven insights, and automation tools are helping Operating Partners make more informed decisions and streamline operations. Technology is also enabling better communication and collaboration between Operating Partners and portfolio companies.

The focus of Operating Partners is broadening beyond financial and operational restructuring, with today's OPs boasting a variety of backgrounds, skills, and responsibilities. This diversity is a result of the evolving business landscape.

Operating partners generally receive a competitive base salary, averaging around $600,000 per year, according to a report by Heidrick.

Their job satisfaction is also high, with one operating partner giving their job 5 stars, saying the only thing that would make their career better is the pay.

In terms of bonuses, operating partners can earn performance-based bonuses that can significantly increase their total compensation, ranging from 20% to 100% of their base salary.

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Carried interest is another key component of their compensation, with operating partners typically receiving a share of the profits generated by the firm's investments, ranging from 1% to 3% of the profits.

Here's a breakdown of the average salary and bonus ranges for operating partners and value creation teams:

Return is a key metric for private equity firms, as they aim to maximize the value of their investment. This is reflected in the industry's shift from leverage and multiples arbitrage to increasing fundamental operational, commercial, and financial performance.

Operating Partners play a crucial role in driving returns by helping portfolio companies improve their operational performance. CD&R's Operating Partners, for instance, work alongside management teams to implement strategic changes.

The returns on investment can be substantial, with Operating Partners helping portfolio companies accelerate growth and strengthen their competitive positioning. ParkerGale Capital's Operating Partners have achieved this by revamping sales processes and introducing scalable customer success frameworks.

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By highlighting the strengths of their operating team, private equity firms can attract limited partners and potential portfolio companies. This is a key aspect of their marketing materials, as both LPs and portcos look to collaborate with firms that can drive returns.

The partnership between general partners, limited partners, and operating partners is essential for driving returns and increasing enterprise value. This new triad is a key aspect of the industry's evolution.

The average salary for an operating partner in the United States is $93,101 per year, or $45 per hour. This can vary widely depending on factors like the size and success of the private equity firm.

If you're considering a career as an operating partner, it's essential to understand the compensation structure. Typically, operating partners receive a combination of salary, bonuses, and carried interest.

Here's a breakdown of the average salary for different roles in private equity firms:

Keep in mind that these figures can vary depending on the private equity firm and the individual's qualifications.

Job satisfaction is a crucial aspect of any career. Operating partners give their job a high rating of 5 stars.

The only thing that would make their career a little better is the pay.

Private equity firms often make significant changes to a company's board of directors to enhance governance and strategic oversight. This typically involves appointing experts with deep industry knowledge.

These experts, including senior operating partners, bring extensive operational expertise and collaborate with the board to set ambitious yet realistic goals. They ensure the management team is equipped to achieve them.

By leveraging industry experience, private equity operating partners provide valuable insights and guidance to drive company success. Thoma Bravo's acquisition of Instructure in 2020 illustrates this approach, where strategic additions to the board provided the necessary strategic insights and operational know-how.

Private equity firms also employ pricing optimization to find the ideal price point where customers perceive value and the company maximizes profits. This is achieved by leveraging data and market insights, often in collaboration with operating partners who have extensive experience in pricing strategies.

By conducting an in-depth analysis of customer behavior, competitive pricing, and industry trends, companies like Lululemon can refine their pricing strategy to align with consumer expectations and market demands. This data-driven approach helped Lululemon improve its profit margins and achieve robust revenue growth.

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Governance plays a vital role in a company's success, and private equity firms know it. They often make significant changes to a company's board of directors to enhance governance and strategic oversight.

Private equity operating partners are experts with deep industry knowledge who bring extensive operational expertise to the table. They collaborate with the board to set ambitious yet realistic goals.

These operating partners provide valuable insights and guidance, leveraging their industry experience to help the company achieve its objectives. They work closely with the management team to ensure they have the necessary skills and resources.

Thoma Bravo's acquisition of Instructure in 2020 is a great example of this approach. By strategically adding experts to Instructure's board, Thoma Bravo provided the strategic insights and operational know-how necessary for the company's success.

Pricing Optimization is a crucial aspect of a product's success. If prices are too high, customers may turn to competitors.

Private equity firms employ pricing optimization to find the ideal price point where customers perceive value, and the company maximizes profits.

By leveraging data and market insights, private equity firms can make informed decisions about pricing. This approach is more effective than relying on intuition.

Advent International partnered with Lululemon and conducted an in-depth analysis of customer behavior, competitive pricing, and industry trends. This data-driven approach helped Lululemon refine its pricing strategy.

The result was improved profit margins and robust revenue growth. Customers felt they were getting good value for their money, which strengthened Lululemon's competitive position in the market.