Since the Operating Partners are responsible for working with portfolio companies to increase value, I was particularly interested in hearing their thoughts at a recent Capital Roundtable conference: Best Practices for Creating Value.
As you might imagine, there was a lot of talk during the sessions and our networking breaks about the opportunities and challenges associated with their jobs. Here’s what I heard.
Much of the discussion during the conference focused on the ways in which Operating Partners work with their portfolio company executives. For many, the relationship building starts early. Increasingly, they are interacting with management teams pre-close to build trust and help them understand what to expect once the deal is done. This is particularly important for CEOs who are entering the world of private equity for the first time. One Operating Partner noted his best practice is to invite the management team from soon-to-be portco to attend a board meeting of another portfolio company with same deal partner so they can see how they are run and what to expect. As one panelist put it, “When you've got a CEO who’s working with private equity for the first time, they've drunk the Kool-Aid but have little to no idea of how hard it will be. You need to help the CEO understand how to go on the journey, how to interact with the board, and how deliver good and bad news to the new investors.” There was a lot of talk on that front – helping CEOs and portfolio company execs navigate the new reality of having a private equity sponsor.
The Operating Partners I spoke with stressed the importance of helping management think about their business differently – “transformation needs to happen,” as one participant put it. While all the Operating Partners made it clear that management runs the businesses they support, they also stressed the importance of providing guidance and tools to help improve performance. The most important factor, they all agreed, was building trust with the CEO and management team. Sometimes that may mean keeping their secrets for a time to give them a chance to work a problem and present the news to the board in their own way. It also includes spending time to understand their issues and what keeps them up at night. Working with a management team to solve a problem early is a great way to build a strong relationship.
Several participants talked about their concerns that management may not have the experience to deliver the transformation required at the speed at which investors expect it to happen. As a result, they are often balancing how fast they can go with the ability of management to execute at that speed. They are sometimes torn between deciding when and whether to supplement the management team vs. when to make replacements.
Many Operating Partners are bringing in part-time resources to support transformation rather than layering more permanent expenses onto the firm. One Operating Partner noted that he is spending a lot of time finding interim/fractional resources - reliable, easy-to-use, cost-effective talent platforms – that can be leveraged across the portfolio. These resources tend to bring specialized expertise to the table around a specific area such as sales ops, ecommerce, and marketing. Increasingly, Operating Partners are building relationships with key consulting firms to deliver that expertise.
There was a lot of discussion about the “Indispensable role of the Operating Partner”. Among the broad range of comments, the ones that stood out for me included:
Like any role, being an Operating Partner is not without its challenges. Dealing with both CEOs and deal partners can sometimes be tough. As one operating partner told me, “CEO is often a high ego job. Add to that the egos from the private equity group and we are often called upon to help both sides navigate the relationship.” Knowing how hard to push can also be a challenge. “You can't shove it down people's throats they have to want it. You need to show them the way to the light at the end.”
While all of the Operating Partners don’t mind and understand the need to be held accountable, they often struggle to quantify their input and return. This can be especially tough when they often see their role as making things happen and then fading into the background to let the CEO take credit.