Operation 'Be essential'

It’s a value-add world out there. Many of you will have witnessed first-hand the growing prevalence of operating partners, and how they’re reshaping the way private equity firms create value at portfolio companies. Especially in the current economic environment, with the global economy still struggling to get out of first gear, their value is undeniable. Pity the GP who lets slip the phrase “financial engineering” whilst on the fundraising trail.

All of which should be enough to give operating partners plenty of kudos around the firm. So at PEI’s Operating Partners Forum in New York last week, we were slightly surprised to learn that at least to some degree, some of them still feel like second-class citizens relative to deal partners.

Yes, there was plenty of buzz and excitement about where the industry is headed, and how operating partners will ultimately help GPs build better businesses. But there was also a feeling amongst delegates that operating partners still have something left to prove. One delegate captured the sentiment neatly when he described them as “intellectually insecure overachievers”. Another delegate mentioned to pfm on the sidelines that operating partners still had to demonstrate their “essentialness” at the firm.

Part of this boils down to culture. Private equity firms are often made up of strong personalities, and so fitting into this hypercompetitive environment can be difficult for certain types. This isn’t something that necessarily ought to change; but senior management should be mindful of these personality differences when setting the parameters of the relationship between operators and deal partners.

For instance, we’ve heard operating partners say that dealmakers can undermine the value creation process by paying too much for an asset. When a few rival shops are locked in a bidding war, the concern is that “testosterone takes over” and the scent of a deal overtakes common sense. To prevent that kind of pressure on management from the start, operators say they should have more involvement pre-acquisition, where they can provide some checks and balance on potential exuberance.

Senior management should also consider setting clearer goals for operators. Some delegates at the conference wondered whether their work was being fully recognized, and/or how to better prove their worth. Not every bit of value created at a company can be easily quantified or measured (and quantifiable metrics are the language deal partners and analysts understand best). That can sometimes make it difficult for operators to articulate their contribution.

Despite all this, it was clear from the conference that operators and deal partners are now on a much more equal playing field compared with just five years ago; the kind of operating partner model where deal partners do the transaction and then hand over the keys to operators is becoming more and more antiquated.

But really making the process work requires a sharper focus on building relationships and encouraging collaboration between the different personality types involved. That’s a challenge senior management need to be keenly aware of – because it won't be easy.