In recent years, the highly competitive deal market has shifted the private equity industry’s emphasis away from financial engineering and put pressure on firms to drive operational value growth in their portfolio companies. As a result, operating partners, whose job is to facilitate on-the-ground value creation, have become key components of investment strategy for many firms. But if there is agreement about what operating partners do—they work intimately with portfolio companies to create value—there is widespread disagreement about who makes a good operating partner and what mix of analytical, experiential, and temperamental qualities are predictive of success in the role.
As the primary liaison between a private equity firm and its portfolio company, an operating partner ensures that the portfolio’s executive team has the people, processes, and tools it needs to meet the goals established by the PE firm’s investment thesis. Though the role requires extensive operational leadership experience—the exact requisites vary according to the industry and the expertise gaps in the management team—an operating partner’s essential tools are communicative: They assess, oversee, socialize, and guide the executive team in the execution of its strategic plan. Poor communication can cause schisms between the deal team and the portfolio company, and these schisms often translate into losses. Misalignments about investment thesis, strategy, performance expectations, and timelines can lead—for example—to unplanned CEO turnover, which often negatively impacts internal rates of return, lengthens hold time, and erodes performance and morale.
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