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‘We’re in this life raft together’

Adding value in a measurable way has become an increasingly crucial part of the private equity business. Creating a sustainable relationship with portfolio company chief executives is a key part of that proposition.

Being an effective operating partner takes a lot of work. Sure, there’s reworking budgets and streamlining human capital, but for some, the real challenge is to form a cohesive, non-combative, relationship with chief executives and senior staff of portfolio companies.

That said, there is not a one-size-fits all approach to assembling a team and implementing a strategy. There are various models for creating value and one of the challenges is how to appropriately engage with portfolio companies without steamrollering them but still having an impact.

For instance, one GP that spoke at Private Equity International’s Operating Partners Forum in New York last week said a successful approach amounted to “a combination of velvet glove and iron fist”.

While executives focused on value creation are expected to help implement change and drive performance, they must balance that with developing a relationship. “It’s establishing that insider credibility instead of saying ‘I’m from headquarters and I was sent to help you,’” said the GP.

One way GPs address portfolio management is to embed operating partners into the portfolio company. As such, dedicated operating partners have the opportunity to show small gestures that instill that feeling of teamwork. For example, one operating partner said that when there are board meetings, he sits on the side of the portfolio company to which he's been seconded. While it may be obvious who he works for, the move is symbolic. “It helps them hate us less,” the operating partner joked.

Other private equity firms focus on recruiting industry heavyweights for senior advisory roles, either instead of or in addition to full-time in-house operational experts.

In the end the model shouldn't really matter, as it's a firm's ability to make a business better that counts and a successful value creation strategy will benefit the company, the fund manager and LPs.