Forum: Boost operating partners' influence

LPs don’t want operating partners to be “treated like second class citizens” as they consider which GPs to invest in, said panellists at the PEI’ Operating Forum.

In a difficult deal market the rise of firms enhancing their operational capabilities seems inevitable as GPs look for “value-add” services to generate returns.

“It is no longer enough to wait for the profits to produce themselves. You won’t find much disagreement in not wanting operational capabilities,” said Helen Steers, partner at fund of funds Pantheon.

To ensure that operating partners do have equal footing alongside the deal team a fairer share of carry is seen as essential.

In the past the pay for investment partners was 50-75 percent more than operating partners, according to Andrew Fulton, founder of private equity recruitment firm AJF Executive Search.

This has changed considerably in recent years as the importance of the operating partner became more evident in the success of investments, according to delegates. 

“Aligning their interest to get them into the equity so that they are not simply making money for other people is important,” said Conor Boden, head of portfolio board development at Advent International.

It is also important for the deal teams and operating partners to have the same level of influence on the investments.

Clayton Dubilier and Rice use a partnership model that puts an investment partner and operating partner into a team with equal say over investments.

“The deal and operating partner teams we have wouldn’t work if they didn’t want to be a team. There’s a huge amount of give and take in the daily workings. They have to share the important decisions,” said Christian Rochat, the lead financial partner for Clayton Dubilier and Rice’s investments in Exova and SPIE.

This role in decision making can be seen clearly when changing management at the portfolio company. Certain decisions become difficult without operating partners close to the business, said Riverside partner Martin Scott, who added it wasn't feasible to select investment solely from financial reports.