pe operating partner benefits and challenges

An operating partner in private equity (PE) can bring significant benefits to a portfolio company. They can provide valuable industry expertise and strategic guidance to help the business grow and improve operations.

One of the key benefits of an operating partner is their ability to help a portfolio company achieve operational synergies, which can lead to cost savings and increased efficiency. For example, they can identify areas where the company can streamline its processes and reduce waste.

Operating partners can also help portfolio companies develop and execute growth strategies, which can lead to increased revenue and market share. They can provide guidance on how to expand into new markets, develop new products, and improve customer relationships.

However, finding and retaining high-quality operating partners can be a challenge for PE firms. It requires a significant investment of time and resources to identify and recruit the right individuals, and to ensure they are a good fit for the portfolio company.

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An operating partner is a proven business leader with a successful track record of creating value in operating companies. They are usually former CEOs, COOs, CFOs, or management consultants with market knowledge of the investment firm's target industries.

Operating partners typically focus on due diligence, strategic planning, commercial growth, operational efficiency, and financial controls. They use their skills and experience to improve portfolio companies.

Operating partners are expected to travel often to engage with portfolio companies and leverage their professional networks to improve portfolio company value.

The benefits of having a PE operating partner are clear. They help drive operational value creation, which is now a top priority for VC and PE firms.

By focusing on increasing fundamental operational, commercial, and financial performance, operating partners can make a real difference in the value of portfolio companies. This, in turn, leads to higher investment returns.

With the new partnership triad between general partners, limited partners, and operating partners, the stage is set for success. Operating partners bring their expertise to the table, helping to maximize the value of investments.

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Operating a PE firm without a strong operating partner can be a recipe for disaster. A good operating partner can help identify and mitigate risks, and provide valuable guidance on how to navigate complex business challenges.

A survey found that 70% of private equity firms believe that a strong operating partner is essential to their success. This is because an operating partner can bring a wealth of knowledge and experience to the table, helping to drive growth and improve profitability.

A well-chosen operating partner can help a PE firm navigate the complexities of a portfolio company's operations, and provide valuable insights on how to improve efficiency and reduce costs. This can be particularly important in industries with high operational complexity, such as manufacturing or healthcare.

However, finding the right operating partner can be a challenge. A good operating partner needs to have the right combination of skills, experience, and personality to be effective. They also need to be able to work well with the PE firm's investment team and the portfolio company's management team.

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Industry leading firms target their spend to produce the highest value. Every dollar of spend needs to bring a return on investment.

A complete assessment at the top of the portco can help avoid costly pitfalls. This includes understanding management's capabilities.

Leaders in this space supplement their in-firm skill set by maintaining a pool of external advisors. These advisors have a breadth of experience in various sectors and technical capabilities that can help keep costs down.

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Managing costs granularly is crucial for any business, and private equity firms are no exception. Industry leaders target their spend to produce the highest value.

Operating teams have a limited fund origination agreement, so every dollar of spend must bring return on investment. This means that every expense must be justified and contribute to the company's growth.

A complete assessment at the top of the portco, including understanding management's capabilities, can help avoid costly pitfalls and find the path forward with only the necessary capital outlay.

Industry leaders supplement their in-firm skill set by maintaining a pool of external advisors with a breadth of experience in various sectors and technical capabilities that can help assist in keeping costs down.

By taking a granular approach to cost management, private equity firms can avoid costly mistakes and focus on maximizing returns on investment.

Business development is a critical focus for private equity funds, with even the smallest funds investing significant effort into helping portfolio companies secure new business.

A dedicated team member from the fund can assist with sales one day a week, while an operating partner with a robust industry network can leverage their contacts to shorten sales cycles and facilitate introductions to potential clients and key stakeholders.

This support can take various forms, such as assigning an operating partner to help negotiate key partnerships, like TPG Capital did with Spotify in 2015.

By negotiating key partnerships, such as those with major music labels and artists, private equity funds can attract millions of new subscribers, significantly boosting the market share of their portfolio companies.

For example, TPG Capital's efforts helped Spotify solidify its position as a leading music streaming service globally, resulting in a successful direct listing on the New York Stock Exchange in 2018.

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A strong operating team is essential for any private equity firm, and it's not just about having a team in place – it's about highlighting their strengths to attract LPs and portfolio companies.

To build a world-class operating team, you should focus on their capabilities and how they can drive value creation in portfolio companies. This can be done by showcasing their expertise in operational efficiency, growth strategies, and organizational development.

A value creation team typically includes operating partners and specialists in areas such as finance, marketing, technology, and human resources. Their main goal is to increase the value of portfolio companies by utilizing their industry knowledge and practical experience.

The ideal value creation team member should have a mix of skills, including communication, strategy, problem-solving, and financial expertise. They should also be proficient in marketing and sales, technology and innovation, change management, and networking and relationship building.

Here are some key skills and background that a value creation team member should have:

In terms of academic credentials, advanced degrees in business, finance, or relevant technical fields provide a strong theoretical foundation and analytical skills. Entrepreneurial experience, such as founding or co-founding a startup, can also be beneficial in navigating the value creation process.

Private equity firms are transforming their operating teams to meet the demands of today's market. This shift is driven by the fact that 47% of value creation now comes from operations, up from 18% in the 1980s.

Industry leaders are adapting to the new macro conditions, recognizing that valuations are at record highs and traditional financial or management team improvements are having less impact on company value. As a result, firms are focusing on more substantial transformation of their portfolio companies.

Limited partners, the parties investing in PE firms, are demanding sophisticated operating teams with specific capabilities in operations. They're looking for industry and functional knowledge to support current portfolio and future investment.

Firms that have met this challenge have seen success, but many others continue to struggle. The new economics of value creation are forcing firms to rethink their operating team strategy.

Here are some key areas where firms are struggling and how industry leading firms are meeting the challenge:

By investing in their operating teams, PE firms can create value into the future and stay ahead of the competition.

Typically, value creation team members receive a competitive base salary that can earn up to $300,000 per year.

Their total compensation can significantly increase with performance-based bonuses, which can range from 20% to 100% of the base salary.

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

Equity stakes in portfolio companies are also possible, allowing operating partners to benefit directly from the appreciation in the value of these companies.

Here's a breakdown of the average salaries for private equity operating partners and value creation teams:

Ten years ago, having a sophisticated operating team was a niche capability, but now it's table stakes. LPs are looking for teams that can help transform their underlying portcos for the better.

Firms that have built out operating teams that can make these changes are already ahead of the game and will likely have a much easier time fundraising than their competitors. This is because they can produce high-value businesses that generate the returns LPs expect.

Creating individual deal thesis with a focus on operating improvements is becoming more common. Some firms are even including operations transformation as part of their value creation plan.

Industry leading firms are treating their operating teams as a strategic differentiator to help enable the returns that their investors expect. Delaying investments in your operating team can put you behind other firms that are moving quickly.

An operating partner should possess a diverse skill set and rich professional background to effectively support portfolio companies. Strong leadership abilities are essential for guiding companies through various growth stages and challenges.

Key skills for an operating partner include leadership, communication, strategic planning, operational efficiency, financial acumen, and problem-solving. They should be able to develop and execute long-term business strategies, optimize resources, and drive overall performance.

An operating partner's background typically includes executive experience, having held senior positions such as CEO, COO, or other executive roles in successful companies. This provides valuable insights and hands-on experience necessary for navigating operational challenges and strategic opportunities.

Operational experience, including managing day-to-day business functions and implementing efficiency improvements, is also vital. Management consulting experience can be beneficial, offering a broad perspective on strategic and operational issues.

Industry expertise is essential, allowing operating partners to offer tailored advice and strategies directly applicable to the portfolio companies they support.

A value creation team should have skills in communication, strategy, problem-solving, and financial expertise. They should also be skilled in marketing and sales proficiency, technology and innovation, change management, and networking and relationship building.

Academic credentials, such as advanced degrees in business, finance, or relevant technical fields, provide a strong theoretical foundation and analytical skills. Entrepreneurial experience, including founding or co-founding startups, provides insight into the value creation process.

Financial savvy is non-negotiable for an operating partner. They must be able to dissect financial statements, understand market trends, and make smart, informed decisions.

The following skills are essential for an operating partner:

An operating partner should have a deep understanding of the industry they're working in, coupled with hands-on operational experience. They should be able to inspire, lead, and manage teams effectively, guiding them toward a shared vision.

Communication skills are the glue that holds everything together. An operating partner must articulate ideas clearly, build strong relationships, and ensure seamless interaction between all stakeholders.