The two key messages from the PEI Operating Partner forum came through loud and clear this year:
- Every PE firm needs an Operating Partner strategy. The structures vary, but LPs now insist that someone is covering the role.
- As the Operating Partner role has become more strategic for PE firms, the focus of the role has matured from cost cutting to sales effectiveness and now onto supporting and driving commercialization and Big M strategic Marketing.
I have attended 5 of the last 6 PEI Operating Partner Forums. During that time, I have seen the role of Operating Partner change significantly. When I first started attending, Operating Partners (OPs) were evolving from cost-focused executives in residence to starting to work with Deal Teams on Value Creation Plans. At that time, being involved in fund raising and participating in LP meetings was an aspiration.
Sharing “How” Growth Gets Implemented
This year we heard from many OPs that not only did LPs want to know that the PE firm had an operating strategy and/or role, but they also wanted to hear from the OPs on how they added value and asked for examples of how they approached implementing growth plans at operating companies. For large PE firms, it was how they balance the use of internal staff with 1099s and external sharpshooter specialty resources. With smaller PE firms it was how the Managing Partner, who also played the OP role, was able to source the right resources. The question moved from, “do you have,” to “how do you utilize” Operating Partner, Resource Groups or external relationships to drive strategic growth and value-added operations at the portfolio firms.
As this shift from do you have to how do you use Operating Partner type roles and resources has continued, so has the depth of involvement of most PE firms with their OpCos. PE involvement, helping a PortCo achieve the investment thesis is continuing to evolve.
Focus Shift from Cost-Saving to Top-Line-Driving
This year I saw a very interesting and important shift. Most of the top PE firms started making the shift from focusing on cost saving to focusing on helping drive topline revenue over the last few years. This year I heard many of the Operating Partners talk about going beyond adding sales people and telling them to use the CRM system, to focusing on what I consider real marketing. A couple of the OPs referred to it as Commercialization. Taking a hard look at the needs of the customers, optimizing the products or services based on customer needs, evaluating the best channel to market, then driving the in-market acceptance. Sales and lead generation, or marketing with a lower-case m, are just this last part, in-market acceptance. Big M Marketing is the strategic first part.
Skills to Build Engines for Growth are Rare
The challenge that Operating Partners who focus on the lower mid-market face is that the skill sets to develop and drive the commercialization, to design, build and start-up the next engine for growth for the company, do not natively reside in lower mid-market companies. You will rarely find that talent on staff when you buy a firm. And you will way over pay if you can attract that person full-time because they will be bored in a year.
The role of the Operating Partner has therefore become in large part the ability to see the need, find the right sharpshooter resource that can hands on do the strategic heavy lifting (design, build and get the engine for growth up and running) and help the CEO understand the need and get the most out of the resource.
The great news is that the Operating Partner does not have to be the hyper-specialized expert in every conceivable field or industry. The role has moved to more of a generalist who can have a big enough perspective to see where an opportunity could be, help the CEO understand what they don’t understand, and know where to find the right resource.
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