Crowe Horwath: Doug Schrock on operating partners

 Doug Schrock  

What qualities should a private equity firm consider when selecting an operating partner?

Clearly the partner needs to be action-oriented to get things done, and he or she should be adaptable to execute on a variety of value-driving projects. Industry experience also is critical to add credibility and serve as a source of pragmatic ideas. That said, the most important attributes slightly differ for each of three basic role types.

In one scenario, an operating partner serves as a full-time executive on the portfolio company’s management team, paid for by the portfolio company. In what are often turnaround or platform cases, it’s critical for the candidate to have prior industry expertise often in the form of former C-level leadership experience.

In other cases, the private equity fund will build an internally staffed operating partner team to drive value at portfolio companies, with each partner perhaps serving more than one company at a time. To take on the cost commitment for this hire, each individual must deliver high-caliber, broad business skills with an ability to communicate as the “make-it-happen” intermediary between the deal team and portfolio leadership. The individual has to be able to continually migrate among a series of problems while getting the most out of company leadership and consultants.

Deep functional specialization tends to be the attribute most critical for the third type of operating partner resource. In this scenario, the private equity firm supplements the operating team with targeted functional skills delivered by a small set of trusted consulting partners.

These ad hoc operating team members fill the need for specialty skill sets such as IT, where neither the company nor the in-house operating team members are true experts. They are more frequently engaged where rapidly changing market or regulatory dynamics require someone who can devote all their time to stay abreast of changes in the functional space.

What should a private equity firm consider when assembling a stable of professionals? Should it choose from each industry the firm specializes in or a range of different skills?

Generally speaking, the more technically specialized the need, the less important industry expertise is. For example, a cybersecurity resource or a state and local tax resource needs to have great functional domain expertise due to the rapidly changing dynamics of those service areas. However, the more generalized business operational domains such as sales or procurement need to differentiate through the addition of specific industry expertise in the resource.

If a firm has to choose between a CEO with industry expertise – say, consumer products – and a CEO who has limited industry exposure but experience with the similar type of turnaround, which should it choose?

Every acquisition, investment thesis, and current operating state creates a unique set of challenges that the operating team needs to address. When we interview potential C-level execs on behalf of our clients there are very often two or even three candidates that might do the job. It’s not so much which one is overall best as which is best for the unique combination of that deal, set of existing personnel, and salary target.

I’ve found that as long as pros and cons of each candidate are fully explored and agreed on, management usually comes to a consensus pick based on what the team values most. A simple warning: If a finalist appears without some uncovered area of shortcoming, it’s generally a sign that the vetting process wasn’t rigorous enough.

This article is sponsored by Crowe Horwath. It was published in a supplement with the October issue of pfm magazine.