What is an Operating Partner and How Do They Fit in PE & VC

In the world of Private Equity (PE) and Venture Capital (VC), there's a key player that helps bridge the gap between investment and execution: the Operating Partner.

An Operating Partner is a seasoned executive who joins a PE or VC firm to provide hands-on expertise and guidance to portfolio companies. This is often a full-time role, with the Operating Partner working closely with the CEO and management team to drive growth and profitability.

Their primary goal is to help portfolio companies achieve their strategic objectives, often by bringing industry expertise and a network of contacts to the table.

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An operating partner is a proven business leader with a successful track record of creating value in operating companies.

They usually have a background as a CEO, COO, CFO, chief revenue officer, management consultant, or someone with market knowledge of private equity, such as deal structuring.

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

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

Their expertise and knowledge help them understand the business, recognize areas of improvement, and execute a strategy to improve profit and efficiency.

Operating partners are usually former CEOs, COOs, CFOs, chief revenue officers, management consultants, or some combination with market knowledge of PE, such as deal structuring, in the investment firm's target industries.

They travel often to engage with portfolio companies and leverage their professional networks to improve portfolio company value.

Their role involves a variety of business activities from acquisitions and daily operations to due diligence and hiring needs.

They essentially ensure the PE firm's goals are being met at the company by addressing any missing pieces in terms of team members, operational efficiency, or timeline clarity.

An operating partner serves as the liaison between the PE portfolio company and the PE firm, keeping the PE firm aware of progress and roadblocks the company is facing.

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An operating partner is a crucial role in the investment cycle, spanning from due diligence to post-transaction integration and liquidity events. They are deployed by investors and boards as a catalyst for change, coaches, or mentors, and sometimes as "sparring partners" for management.

Operating partners manage short- to medium-term and long-term operational improvement programs for portfolio companies. They support management in day-to-day operations, as interim management, board members or observers, and/or as advisors.

Their role should not be confused with that of a venture partner or an entrepreneur-in-residence (EIR). Venture partners are non-salaried external resources who source deals and play 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. An EIR, on the other hand, works on only a single company and typically steps into the company as the full-time CEO, CFO, or other c-level position.

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Here are the key areas where operating partners make an impact:

In essence, operating partners are multifaceted professionals who bring strategic insight and hands-on expertise to the table. They are no longer just advisors or project managers but are now seen as strategic growth leaders.

An operating partner brings a unique set of skills to the table, making them an essential part of a private equity firm. They bridge the gap between high-level strategy and day-to-day operations, ensuring sustainable growth and profitability.

In today's competitive market, traditional financial engineering is no longer enough to secure high returns. Investors now look for tangible, operational improvements to create value. Operating partners provide this expertise, complementing the financial acumen of deal teams.

Their presence can be a deciding factor for investors when choosing a firm. Operating partners help mitigate risks and seize growth opportunities that might otherwise be overlooked. This is especially valuable in industries facing rapid technological changes and evolving consumer demands.

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Operating partners focus on increasing sales through new markets or product lines, reducing waste and improving operational efficiency, and ensuring the right people are in the right roles. These responsibilities and strategies provide a significant impact on the success of portfolio companies.

Here are some key strategies operating partners use to drive business performance:

By focusing on strategic initiatives and operational excellence, operating partners help companies achieve sustainable growth and maximize returns for investors.

There are several models of Operating Partners, each with its own strengths and weaknesses. Full-time Operating Partners are deeply integrated into the private equity firm and often 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. This continuous involvement allows them to shape strategy and influence company culture directly, ensuring a cohesive approach to value creation.

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The choice of model depends on several factors, such as the firm's operational strategy, the complexity of the portfolio company's challenges, and the resources available. For firms that prioritize deep operational involvement, the full-time or internal models offer a more integrated approach.

A consultant-based model is best suited for one-off projects or when seeking advice on highly specific issues.

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In the world of private equity, understanding the different types of partners is key to navigating the industry. A General Partner is responsible for making investment decisions and managing the day-to-day operations of the firm.

Private equity firms typically have a General Partner who oversees the investment strategy and decision-making process. This person is often the founder or managing partner of the firm.

Operating Partners, on the other hand, are experienced professionals who work closely with the General Partner to execute investment plans and provide operational expertise. They often have a deep understanding of the industry and can help identify potential investment opportunities.

Limited Partners are investors who provide capital to the private equity firm in exchange for a share of the profits. They typically have no involvement in the day-to-day operations of the firm and are limited to passive participation.

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Choosing the right Operating Partner model is crucial for a private equity firm's success. The choice depends on several factors, such as the firm's operational strategy, the complexity of the portfolio company's challenges, and the resources available.

For firms that prioritize deep operational involvement, the full-time or internal models offer a more integrated approach. This is ideal for companies that need hands-on guidance and support across all operational areas.

The consultant-based model is best suited for one-off projects or when seeking advice on highly specific issues. This model offers the highest level of flexibility, enabling the firm to deploy the right expertise at the right time.

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

Part-time or external Operating Partners can provide targeted solutions for firms that need specialized skills or want to address short-term challenges. This model is ideal for situations where a high level of flexibility is required.

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Becoming an operating partner is a challenging yet rewarding career path. It often starts with a career in management consulting or senior roles within large corporations.

Consultants from top firms like Bain or McKinsey frequently transition into this role, leveraging their strategic planning and operational improvement skills. Executives from industry-specific backgrounds, such as tech or manufacturing, may also move into operating partner roles, bringing a depth of industry knowledge.

Many operating partners find their way into private equity through networking and relationships built over years in their respective industries. As they prove their ability to enhance business operations and drive growth, they become attractive candidates for these pivotal positions.

To increase your chances of becoming an operating partner, consider the following key skills and experience:

Developing a unique blend of skills and experience will help you stand out as a candidate for operating partner roles.

Operating Partners face a range of challenges as they work with portfolio companies. Aligning with Portfolio Company Leadership can be a significant hurdle, especially when implementing new strategies or operational changes.

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.

Resource Constraints and Time Management are also common obstacles. With multiple portfolio companies under their purview, Operating Partners are often stretched thin, leading to challenges in prioritizing where to allocate their time and resources.

Here are some common challenges Operating Partners face:

As the business landscape evolves, so does the role of the Operating Partner. The future of Operating Partners is likely to be shaped by emerging trends, including a stronger emphasis on operational value creation and sector specialization.

Operating Partners often struggle with gaining buy-in from portfolio company executives, which can create friction and slow down decision-making.

This is because Operating Partners are often seen as outsiders by the management team, making it difficult to implement new strategies or operational changes.

Aligning with Portfolio Company Leadership can be a significant challenge, requiring Operating Partners to strike a delicate balance between offering high-level strategic guidance and being directly involved in day-to-day operations.

Resource Constraints and Time Management are also major obstacles, as Operating Partners are often stretched thin, leading to challenges in prioritizing where to allocate their time and resources.

Here are some common obstacles faced by Operating Partners:

The Future of Operating Partners is looking bright. With a growing trend towards sector specialization, Operating Partners are bringing deep expertise in specific industries like healthcare, technology, or consumer products.

Operating Partners are no longer just about financial and operational restructuring, but a more diverse breed boasting a variety of backgrounds, skills, and responsibilities. As the business landscape evolves, their role is adapting to meet new challenges and opportunities.

Private equity and venture capital firms are placing a stronger emphasis on operational value creation, making Operating Partners an integral part of investment strategies. This shift is driving the need for Operating Partners to integrate sustainability and ethical considerations into business operations.

The role of Operating Partners in transforming businesses is critical, as seen in the case of Clayton, Dubilier & Rice (CD&R), which embeds seasoned operating executives into its portfolio companies. This operational involvement enables portfolio companies to accelerate growth and strengthen their competitive positioning.

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