I recently attended ACG Philadelphia’s April Breakfast Briefing on The Growing Role of the PE Operating Partner. I was also able to engage with a number of Operating Partners at ACG’s Intergrowth in Las Vegas this week. Both the Philadelphia breakfast and the presence of so many Operating Partners at Intergrowth, are indications of how key these professionals are to the value creation process, and to the delivery of outsized investment returns (differentiated alpha) for private equity investors.
These events, and others like them at ACG chapters in Boston, NY, and elsewhere, give me an opportunity to uncover what’s on the mind of value creators throughout the private equity ecosystem. I’m pleased to offer these takeaways.
Management teams are asked to do much more these days - from running the business and hitting the numbers to transforming the business to fulfill the investment thesis. As a result, they need more support than ever to achieve all that they are asked to do. Operating Partners are becoming much more important than ever in helping portfolio company management achieve their goals and execute the initiatives to move the company forward.
As one Operating Partner put it, their role is to help the management team transform from “the company we bought to the company we are going to sell.” To achieve this, they need to grow the company fast and move the company in the strategic direction of the investment thesis. Hence, the job of the Operating Partners is to deliver a business that is bigger, better managed, and better positioned for future growth for the next investor at exit.
Every business has its own operating rhythm and staffing model, which the Operating Partner needs to understand and work within, even as they seek to influence change in the organization. Understanding the growth levers available to portfolio companies and how to best apply them is critical to success. The growth levers that are most frequently highlighted in these sessions include the following:
Technology - One of the biggest changes in all businesses over the past few years has been the intensified focus and pivot towards technology. Technology improvement and digital transformation in all aspects of business from operations to HR to marketing have become imperative for middle market companies and investors.
What’s more, there’s a needed shift underway that’s driving them to move from “inside out” digital transformation (such as ERP systems) to “outside-in” digital transformation by focusing on the things that impact the customers and go-to-market first.
Pricing - Many portfolio companies have more pricing power than they think they do and it’s often the job of the Operating Partner to help them unlock that potential. Middle market companies need to not only match their pricing methodology to their bill-of-material inputs, they also need to take advantage of pricing opportunities in the market by shifting product/customer mix to higher margin opportunities, particularly in inflationary environments.
Another important aspect that many middle market companies need help with is the way in which their salespeople talk about price, as well as the different pricing levers available such as freight surcharges, service levels, or other terms.
Commercial Operations - There is as much leverage today in marketing spend in middle-market companies as in sales spend. Traditional go-to-market focus has been centered on the sales side of the coin with investments sales resources, CRM, and support (such as SDRs and BDRs). The marketing aspects of go-to-market are becoming more important with new focus and investments going to such things as Voice-of-the Customer (VOC) research, customer profiling, mapping the buyers’ process, and marketing automation. As one Operating Partner put it, “Voice of the customer is becoming not only more important and impactful but is now a prerequisite.”
One of the roles of the Operating Partner is to respectfully challenge the leadership team’s thinking. Operating Partners need to understand what paradigms the management teams may be locked into that can hold them back. These can be anything from people to sales models, to expectations around pricing policies.
By helping them think differently about these aspects of the business and showing how a new way of approaching them can work—often by showing how it’s worked elsewhere—Operating Partners can break through roadblocks that may be standing in the way of transformation.
It’s important for the Operating Partner to help paint the picture of the future state of the organization to the management team as well as the broader company. They are able to do this by bringing “been there, done that” expertise to the table earned through multiple repetitions in across multiple firms. Conversely, management teams may only get 1-2 times “at bats”.
Outside resources (like Chief Outsiders) that can parachute into portfolio companies with experienced talent and playbooks such as assessments to give the management team a taste of what they can achieve are very helpful.
My plan is to continue to write about the expanding role of Operating Partners. And I also hope to connect with those in the Operating Partner community to share their insights and perspectives.