Operating partners are business leaders with proven track records of building shareholder value. As far as developing strategies to boost venture firms’ profits, they’re better than general partners who are single-mindedly fixated on deals.
They have Rolodexes chock full of connections, so they’re in an excellent position to leverage their professional networks to increase portfolio companies’ worth.
Private equity firms see lower returns as the greatest danger to their businesses. One solution to this problem is to place operating partners in their portfolio companies.
In this article, we’ll go over:
- What an operating partner is
- How much they make
- Do operating partners get carried interest?
What’s an operating partner for startups?
Every private capital firm seeks to maximize the value of its investment. In the past, this was accomplished primarily through financial engineering. However, investment firms increasingly recognize that unless this strategy is accompanied by building up the enterprise's underlying value, they won't realize their investments' full potential.
Operating partners assess the value of privately held companies during the due diligence process.
They then use their skills to generate value by improving a business’s cash flow or increasing its valuation multiple. Another thing they do is to create strategic plans to strengthen the portfolio company's weak areas.
At some companies, operational executives serve on deal teams. That way, they can use their industry expertise to advise whether a deal is good or not.
Because they’re able to do this, they contribute valuable insights into the advisability of proposed operational improvements.
Operating partners might become venture partners if they have a talent for finding exceptional deals. With deal competition pushing valuations up, operational improvements are more important than ever for companies seeking to continue delivering above-average returns for their investors.
Operating partners are usually deployed to a business for three to six months. Once the project is finished, they move on to the next company.
Liaison between equity firm and companies
An operating partner is the primary liaison between a private equity firm and its portfolio companies. The operating partner ensures that the company’s executive team has the resources, team members, and processes it needs to meet the objectives established by the firm.
Operating partners also make sure that there’s good communication between the private equity firm and the portfolio company. That way, they prevent disagreement from turning into financial losses.
An operating partner is like being a coach or an advisor. Portfolio companies receive support whenever they need it from experts. This helps with difficult challenges that portfolio company leaders can’t solve on their own.
The origin of the role
Large-capitalization equity groups created the role of operating partner after building value in a portfolio company became more important than financial engineering.
Creating value in a portfolio company is better achieved by a partner who works for the company than by relying on outside consultants. That’s why the job has evolved into a full-time position in many firms.
In the past, private equity firms would structure a deal, then hire outside consultants to put together an operational plan.
The consultants would come to the office, draft their report, send an invoice, and leave. That didn’t work the way it should have because the consultants were all that invested in the success of the company.
That’s why firms started to build their internal consulting teams of team members with operational experience to work with portfolio companies. These operating partners often receive the same incentives as partners who specialize in deal-making.
Examples of operating partners
Partners experienced in running established organizations can increase profits, thereby ensuring the investment firm of a higher return.
After Jack Welch retired from General Electric, he served as an operating partner at Clayton, Dubilier, & Rice, a private equity company.
Bain Capital has been using operating partners for years. They now have one of the largest teams of in-house operations-oriented professionals.
Bain Capital managing director Steve Barnes says, "Our heritage is deeply rooted in a consulting and operating background. The original thesis was to have professionals who understand strategy and what it takes to get things done within a company.
That way, we would do a better job of selecting assets and a better job with the assets once we owned them in our portfolio."
The Blackstone Group has employees it calls the "portfolio management team." Members of this team have operating specialties organized not around industry expertise but around business capabilities that can be used in Blackstone's portfolio companies.
For example, it has people with know-how in supply chain issues, pricing, and sales force management.
How much do operating partners make?
Operational partners can expect to make $269,000 a year in combined base salary and bonuses in the US. Vice presidents of operation functions earn $349,000 a year.
Although operating partners sometimes find companies to invest in, what they receive in compensation reflects their primary responsibilities. Venture partners generally get a more significant piece of the carry on any deals they initiate. Operating partners usually get less.
Do operating partners get carried interest?
Carried interest is a portion of any profits private equity funds make given out as compensation to firm partners. However, carried interest is often only paid if the fund’s returns meet a certain threshold. Although this can result in astronomical payouts, it can also amount to nothing after years of hard work.
What kind of background should an operating partner have?
Operating partners should be familiar with the experience of overseeing an institutionally backed portfolio company. Individuals who know how it feels to work in companies receiving institutional funding are in an excellent position to help others in the same boat.
CEOs who worked in a portfolio company and are now operating partners know the problems poorly communicated plans or unreasonable demands can cause.
This can help them to set reasonable expectations and adapt strategy to reflect conditions on the ground. Former consultants without experience running a company funded by institutional investment can succeed if they have experience as operational executives.
Steve Dyke of Align Capital Partners says, "The ability to come in and quickly establish rapport with a CEO and senior management team is critical for an operating partner. The best way to do that is to demonstrate that you've sat in their seat before you had success and are willing to listen to them."
He goes on to say: “The most successful operating partners we’ve hired understand that they’re not there to run the portfolio company themselves, but rather to work with, mentor, and influence the management team.
“We’re not looking to turn CEOs into general managers. Thus, an ability to work collaboratively with an existing team is imperative to being a successful operating partner.”
An operating partner needs extensive operational experience because they guide the executive team to execute its strategic plan. The perfect operating partner candidate will not only have portfolio company CEO experience, but they’ll also have management consulting experience.
Board experience is also a plus. That’s because operating partners with this kind of experience can help new portfolio CEOs navigate the difficulties of working with the company’s board.
Also, former board members have a wealth of valuable connections they can use in their new roles.
Why you might not want an operating partner
Former CEOs now acting in an operating partner capacity need to learn to lead by persuasion instead of by directive. Sometimes, former CEOs have trouble doing that.
Operating partners must travel a lot. It might be challenging for ex-CEOs to get acclimated to this kind of schedule.
Also, many retired leaders are used to having loads of leisure time. They often don’t realize the workload that comes with being an operating partner.
Kevin Landry, chief executive of TA Associates, doesn’t believe in operating partners. “We don’t have [them],” he says. “We expect everyone here to be a complete player. If a company becomes a problem, then it’s his or her problem.
“We might bring in some people [from an] industry who can be helpful on the board, and maybe even active board members, but we’re not going to have people here that we would call operating partners.”
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