What is an Operating Partner?

Operating partners are an essential component within private equity (PE) firms acting as the link between the PE firms and their portfolio companies. They are experienced executives who work closely with the management teams of these portfolio companies. 

Their primary objective is to enhance efficiency, strategize effectively, and ultimately drive profitability. Their role encompasses that of an advisor, mentor, and coach, providing hands-on guidance and valuable strategic insights. By leveraging their expertise in functions, leadership capabilities, and extensive industry experience, they contribute to unlocking growth potential, operational efficiency, and value within these companies.

In contrast to traditional PE professionals whose focus revolves around deals, fundraising activities, and financial engineering aspects, operating partners specialize in other areas too. Their main involvement lies in driving enhancements within portfolio companies post-acquisition. They implement practical changes to boost cash flow generation and reduce costs effectively. Typically, C-suite executives seek involvement in business without committing to a full-time executive role. Meanwhile, operating partners relish the opportunity of working across diverse companies and industries while maintaining close collaboration with deal teams, for value-creation purposes. Operating partners play a vital role in PE firms as they provide expertise and support to these firms that lack experience in specific industries.

History and Rise of Operating Partners

In the 1980s, private equity firms introduced the idea of operating partners to enhance their investment teams with expertise. As they expanded their portfolios to include companies across industries during the 1970s, they recognized the value of having executives with industry experience collaborating closely with portfolio company management.

By onboarding operating partners, these firms could collaborate with executives and entrepreneurs who had operational backgrounds. This complemented the expertise of their investment professionals allowing them to become business leaders, assist with diligence, evaluate potential investments, make strategic plans and provide guidance throughout the acquisition process.

Over time, the role of operating partners expanded beyond evaluating investments. They became instrumental in driving improvements within portfolio companies by implementing growth strategies and providing hands-on monitoring and guidance. This hands-on approach added value to investments made by equity firms.

As private equity deal volume and size experienced growth between 2000 and 2008, there was an increased demand for operating partners. This surge was driven by the idea that having experts on board who could actively contribute to deal enhancements could greatly impact investment outcomes.

Their expertise in operations has become crucial for evaluating, organizing, and improving the scale of deals across various industries.

In the current business environment, many prominent private equity companies depend significantly on operating partners and advisors to assist in finding investment opportunities, carrying out assessments, and enhancing value after acquiring assets. The approach of using operating partners has shown success in providing benefits to partners.

Main Responsibilities and Duties

Serving as a bridge between the board members of the equity firm and its portfolio companies, the operating partner is entrusted with providing operational guidance. The key responsibilities typically include:

• Working alongside the CEO and management team of the portfolio company. As an advisor and coach to the leadership team, the operating partner offers perspectives and makes recommendations.
• Analyzing business challenges to identify areas for improvement. This is done through assessments of business operations, finances, sales strategies, and marketing efforts to pinpoint opportunities for optimization.
• Developing plans that foster growth and enhance efficiency. Leveraging their experience, operating partners collaborate on growth strategies, facilitate expansion into new markets, and optimize supply chain management and production workflows.
• Engaging in strategies aimed at increasing profits and enhancing cash flow. The responsibilities of an operating partner in spearheading efforts to boost profitability include renegotiating agreements with suppliers and vendors optimizing stock levels cutting costs and LEAN introducing practices.
• Monitor key performance indicators (KPIs) and financial performance. They ensure that the company's operations team is meeting targets and milestones by staying updated on reports, sales dashboards, and other relevant metrics.
• Implementing operational best practices to introduce consistency and excellence to processes. This includes introducing systems establishing KPIs/metrics and providing tools that enhance performance.

By collaborating with management teams to instill practices, improve management systems, and promote financial discipline, operating partners contribute significant value to portfolio companies. Their leadership enables companies to enhance their performance trajectory and generate returns for equity investors.

Required Skills and Experience

To become an operating partner, there is a requirement of a minimum of 10-15 years of experience as a CEO, COO, or in a C-level position. Private equity firms look for operating partners who have demonstrated success in expanding businesses, revitalizing companies, or reaching goals such as guiding a company through an IPO or successful sale.

Exceptional leadership and communication skills are essential for operating partners as they regularly engage with CEOs, board members and management teams from portfolio companies. They provide guidance and operational support to drive success. Establishing trust and promoting collaboration play a key role in their responsibilities.

Successful operating partners use their knowledge of market trends, new technologies, and operational strategies to pinpoint areas where portfolio companies can improve. Certain private equity firms favor operating partners with expertise in industries such as healthcare, financial services, or manufacturing.

Operating partners who excel bring together experience, effective leadership capabilities, and specialized knowledge in their fields. By leveraging their skills and providing direction, they empower equity firms to fully capitalize on their investments.

Compensation for Operating Partners

The compensation structure for operating partners often aligns their incentives with those of the equity firm and its portfolio companies. It consists of three components;

• Base Salary: The base salary typically ranges from $200K to $500K+, depending on factors such as the operating partner's experience, reputation, and the size of the equity firm. This salary provides a guaranteed payment.
• Carried Interest/Bonus: Operating partners usually receive 10%-30% of profits generated from investments as carried interest. This serves as performance-based compensation tied to value creation. The specific percentage can vary based on negotiations.
• Equity in the Fund: Some private equity firms offer operating partners the opportunity to have a stake in the ownership of their fund. This gives the operating partner a share and additional motivation to ensure the fund’s success. The exact percentage of equity varies but can be quite substantial.

By having a carried interest and equity arrangement, successful operating partners have the potential to earn multimillion-dollar compensations annually. However, they also take on risk by tying their pay to how the equity funds’ investments perform.

Reasons for Having an Operating Partner;

Having an operating partner is beneficial for equity firms aiming to maximize returns on their investments. Here are some key benefits:

Operational Expertise

Operating partners use their backgrounds to analyze portfolio companies, pinpoint inefficiencies, and provide recommendations for enhancing operational efficiency.

Deal Sourcing

Operating partners leverage their professional networks, and industry knowledge to discover investment opportunities and evaluate potential acquisitions while offering valuable insights during the evaluation process.

Industry Relationships

Operating partners bring industry connections that facilitate partnerships and enable access to deals, strengthening a private equity firm's ability to conduct thorough due diligence and negotiate more favorable terms.

Reasons to Consider Alternatives to an Operating Partner

While operating partners can offer expertise and guidance there are factors to take into account;

Expensive compensation

Partners who are actively involved in the operations usually earn salaries between $200,000 and $500,000, along with a portion of the profits from investments. It's crucial to consider this cost in relation to the benefits they provide.

Confusion over the chain of command

The final decision-making power between the managing partner and the CEO of the company in the investment portfolio can be ambiguous which might weaken the CEO's authority, leading to friction within the company.

Limited industry-specific knowledge

Although operating partners possess management expertise, they may lack an understanding of the specific dynamics within a particular company or industry. This limitation could restrict their ability to provide tailored advice.

Difficulty finding relevant experience

Identifying operating partners with industry and situational experience that aligns with the hiring needs of the portfolio company can be challenging. Candidates who possess skills but lack execution may contribute less value overall.

Potentially misaligned incentives

Operating partners who receive most of their compensation through a share in investment profits may prioritize improving metrics over implementing changes that support long-term growth. As a result, their incentives might not fully align with the interests of the portfolio company.

Becoming an Operating Partner

For professionals seeking an exciting challenge, stepping into the role of an operating partner can be a highly attractive career move. Here's an overview of the career pathway and some valuable tips on how to position yourself for success in this role:

Career Pathway

• Most operating partners begin their journey as CEOs, COOs, or other top-level executives at established companies. They leverage their experience in these positions to transition into the role of an operating partner.
• To succeed in this position it's essential to have a substantial amount of hands-on experience, preferably accumulated over a decade or more. This demonstrates your thinking and operational expertise which are essential for driving improvements.
• Having knowledge within an industry such as healthcare, financial services or manufacturing is highly desirable. Investors seek operating partners who understand the industry in which their portfolio companies operate.
• Networking plays a role in breaking into this field. Building connections with equity (PE) firms and their recruiting teams is key.
• In some cases, starting as an advisor or consultant to PE firms can serve as a stepping stone before transitioning into the operating partner role.

Preparing for Interviews

• Thoroughly research the firm's portfolio companies and investment thesis to understand how your background aligns with their goals.
• Highlight your accomplishments that drove success throughout your career. Be sure to quantify the results you have achieved.
• During interviews, ask thought-provoking questions about the firm's approach to operations and how they create value. This will demonstrate your thinking abilities.
• Emphasize your collaborative leadership style and ability to partner with management teams effectively.
• Discuss industry insights and relationships you can leverage to help source deals.
• Align with others on the expected workload, compensation, and overall incentives.

Positioning Yourself

• When positioning yourself in this field, it is essential to update your LinkedIn profile by highlighting your experience, leadership abilities, and industry expertise. Additionally, leverage your network to connect with known operating partners or equity (PE) investors. Seek out interviews to gain knowledge about the industry.
• Consider starting as an advisor before transitioning into an operating partner role. This will allow you to gain exposure and experience in equity.
• Joining PE associations or networking groups can be beneficial for building relationships and exploring opportunities.
• Highlight your expertise and interest in mentoring and coaching, that you have developed as an executive.

Day-to-Day Responsibilities of an Operating Partner

As an operating partner, your day to day operations revolve around analyzing portfolio companies, developing recommendations, and monitoring performance. Some typical tasks include:

1. Conducting financial analysis of portfolio companies to identify areas for improvement. This involves reviewing statements in detail, analyzing sales and marketing data, evaluating production efficiency within the supply chain, and assessing management capabilities.
2. Developing recommendations and execution plans that drive growth and operational improvements at portfolio companies. These plans outline initiatives, required resources, and timelines for implementation. Recommendations may include optimizing production, expanding into markets, acquiring businesses implementing innovative technologies, or restructuring the management team.
3. Monitoring performance indicators (KPIs) and financial performance to ensure portfolio companies achieve their goals. Operating partners consistently track metrics such as revenue, profitability, cash flow, customer retention, production levels, and quality control. They evaluate progress on initiatives and growth strategies.
4. Identifying business challenges, and providing troubleshooting assistance when portfolio companies face difficulties. Operating partners strive to identify problems and develop solutions to restore performance. This may involve providing hands-on management support.
5. Participating in board meetings and maintaining open communication with the management team. Operating partners offer guidance to CEOs and executives of portfolio companies. They also keep the equity firm updated on progress and any issues encountered.
6. Conducting on-site visits and engaging in management calls to oversee operations and the execution of plans. This allows operating partners to understand the challenges faced by portfolio companies.

The role of an operating partner is highly engaging as they offer operational support to drive improved financial returns. Their oversight and expertise play a role in enabling equity firms to unlock value in their investments.

Future of Operating Partners: How the Role is Evolving

The role of operating partners has undergone changes since its inception in the 1980s. It continues to evolve alongside the growing private equity industry. Let's explore some of the trends that are shaping the future of operating partners;

Specialization

With the increasing complexity of investments in industries and business models, private equity firms are recognizing the need for operating partners. These partners bring expertise in healthcare, technology, e-commerce, and other sectors allowing for tailored strategic and operational support.

Earlier Involvement

Operating partners are now playing a role in the investment process, assisting firms in market research and evaluating potential deals. Their industry insights help assess risks and identify growth opportunities. Operating partners also have the advantage of sourcing deals through their networks.

Rise of Interim Executives

In some cases, operating partners are brought in as interim executives to fill roles such as the CEO at struggling portfolio companies. This hands-on approach enables them to implement changes directly.

Expanded Roles

Operating partners are taking on expanded responsibilities in strategic planning, business development, and talent recruitment. They may also engage with partners, and assist with fundraising efforts.

Next-Generation Partners

As the private equity industry evolves, firms are actively seeking operating partners with an understanding of modern management practices and technologies.

Integrated Teams

Deals now involve integrated teams where operating partners can work collaboratively with colleagues, right from the beginning.

The role of the operating partner will keep changing as equity adapts to challenges and investment approaches. The future of value creation will be influenced by knowledge, deal structures, flexibility, in operations, and the integration of technology.

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