What makes a great private equity operating partner?

Contributed by Paul Reading from EY
I recently had the pleasure of moderating a panel at the PEI Operating Partners Forum: Europe, in London, where I asked “What skills make a good operating partner?”
The panel featured Daniel Sasaki, Managing Partner, Mayfair Equity Partners, James Bilefield, Digital Expert and Entrepreneur, Eric Nicoli, Experienced Exec & Non-Exec Chairman & Kirsten English, CEO, Style Research

The answer, from my panel of leading mid-market CEOs, NXDs and private equity deal partners, was unanimous: “it depends…”

That’s no cop out. The rise of the operating partner has come to prominence in the private equity industry over the last decade, and every firm does it differently. Operating partner models vary enormously, perhaps because they are a magnification of how firms engage with portfolio companies, the types of business they work with and the breadth of their sector coverage. In some ways, the operating partner model is the investment strategy writ large.

But however it’s done, there is little doubt that portfolio management skills are essential in mid-market private equity. In a world of high valuations, operational value creation has become an even more important lever and, according to most recent studies, the largest contributor to private equity returns. That can’t be achieved by just stripping out inefficiencies or rolling out the next incremental phase of company growth. Rather it requires a comprehensive review of top and bottom line value levers that can accelerate the pace of revenue and EBITDA growth.

As a result, operating partners who are traditionally considered part of private equity’s supporting cast, increasingly find themselves centre stage.

So, back to the opening question. What makes a good one?

Well, it’s a tough job. CEOs and NXDs value talking to someone with an operational perspective who is somewhat detached from the private equity mothership. So they must be trusted by the portfolio company, while doing right by the investor. They must be supportive without allowing the business to become dependent upon them. As a group, it is critical that operating partners can quickly build rapport and credibility with the portfolio company management team, but they also need the hard analytical skills and creativity to uncover value that other owners or the incumbent management team haven’t reached.

There was little consensus on the fundamental role of operating partners among my panellists. Some see them as a way of enabling enhanced speed of delivery; some as accessing specialist functional expertise; some as an effective bridge between the portfolio company and PE house; and some as a way of extending managerial bandwidth, particularly in high growth middle market businesses. For instance, instilling best practice business processes that might be familiar to larger companies but less so in the high growth mid-market.

The world moves quickly and the optimal operating partner skill set is changing too. Even if you haven’t swallowed the pill that AI / big data / blockchain et al, will change everything, there is little doubt that the speed of digital disruption necessitates specialist input that goes beyond today’s traditional value levers.

The very concept of operating partners is also changing: their role is expanding beyond the confines of portfolio management and they are now increasingly involved pre-deal in scoping and shaping due diligence, assessing management teams, co-creating the value creation plan and influencing discussions regarding valuation. In many ways this is something of a mirror image of EY’s evolution from traditional diligence advisor in the pre-deal phase to become a trusted adviser across the full private equity investment lifecycle: (i) working with PE houses and management teams pre-deal to identify the full value potential of an asset; (ii) translating this full value potential into an actionable plan; (iii) working with portfolio company management teams during the hold period to enhance and accelerate the pace of delivery (iv) completing robust exit readiness planning to maximise exit value.

We agree that operating partners play an increasingly crucial role, and they have a hugely complex and varied job. They deserve world-class support just as much as the deal team. In fact, some suggest the next evolution of the industry is a convergence of operational and investment roles. This could be particularly relevant in the mid-market, where sector focused teams and tightly knit partnerships are well placed to further integrate the role of operating partners.

In the ceaseless race to find the fittest operating model, it’s clear that private equity firms practice what they preach.

The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.

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