Private equity firms are always seeking innovative ways to drive growth and maximize returns for their investors. One increasingly vital strategy is the deployment of operating partners. These seasoned professionals have extensive industry experience, as well as a track record of increasing shareholder value. They focus on strategic and operational improvements within portfolio companies, using their extensive networks and expertise to create significant value. These professionals excel in private equity value creation, ensuring that every investment realizes its full potential.
In this article, we will examine what a private equity operating partner in a value creation team is, explore the skills and background these professionals typically possess, discuss their compensation, and delve into the specific roles they play in creating value for private equity firms.
And, for more in-depth insights, check out our YouTube video where we debunk some common private equity myths.
What Is an Operating Partner in a Value Creation Team?
A private equity operating partner is a highly experienced professional hired by private equity firms to enhance the performance and value of their portfolio companies. Unlike investment partners who focus on deal sourcing and financial structuring, operating partners work closely with the management teams of portfolio companies, providing guidance on crucial areas such as operational efficiency, growth strategies, and organizational development.
Similarly, a value creation team is a specialized group of professionals within a private equity firm dedicated to improving the operational efficiency and profitability of its investments. This team typically includes operating partners and other specialists in areas such as finance, marketing, technology, and human resources.
The main collective goal of an operating partner and a value creation team is to increase the value of portfolio companies. By utilizing their industry knowledge and practical experience, they ensure that portfolio companies not only meet but exceed performance expectations, ultimately leading to successful exits and substantial returns for investors.
What Skills and Background Should an Operating Partner Have?
A private equity operating partner should possess a diverse skill set and a rich professional background to effectively support portfolio companies. Key skills include:
- Leadership: Strong leadership abilities are essential for guiding companies through various growth stages and challenges, driving strategic initiatives and fostering a culture of innovation and accountability.
- Communication: Excellent communication skills are necessary to effectively interact with portfolio company teams and VC firm stakeholders, articulate strategies, provide feedback, and drive collaboration.
- Strategic Planning: Expertise in developing and executing long-term business strategies helps portfolio companies align their operations with market opportunities.
- Operational Efficiency: Knowledge of best practices in operational processes helps ensure that portfolio companies optimize their resources and enhance overall performance.
- Financial Acumen: An ability to oversee financial controls, budgeting, and financial planning is crucial for ensuring the financial health and sustainability of portfolio companies.
- Problem-Solving: Strong analytical and problem-solving skills are important for identifying issues and implementing effective solutions that drive company growth and performance.
An operating partner’s background typically includes:
- Executive Experience: Having held senior positions such as CEO, COO, or other executive roles in successful companies, particularly in those that were part of a portfolio, provides valuable insights and hands-on experience that are necessary for navigating the operational challenges and strategic opportunities that portfolio companies may encounter.
- Operational Experience: Deep operational experience, including managing day-to-day business functions and implementing efficiency improvements, is vital as it allows the operating partner to identify and implement process improvements, optimize resource allocation, and drive overall efficiency within portfolio companies.
- Management Consulting: Experience in management consulting can be beneficial, offering a broad perspective on strategic and operational issues across various industries and companies.
- Industry Expertise: Specialized knowledge in specific industries allows operating partners to offer tailored advice and strategies that are directly applicable to the portfolio companies they support.
What Skills and Background Should a Value Creation Team Have?
Similar to a private equity operating partner, it is vital for value creation team members to have skills in communication, strategy, problem-solving, and financial expertise. In addition to these, they should also be skilled in:
- Marketing and Sales Proficiency: Expertise in building and executing marketing strategies and sales processes helps drive customer acquisition and revenue growth.
- Technology and Innovation: Knowledge of current technologies and innovation trends supports digital business transformation and gives portfolio companies a competitive advantage.
- Change Management: Skills in managing and implementing change within organizations help ensure smooth transitions during periods of growth or restructuring.
- Networking and Relationship Building: An ability to leverage a broad network of industry contacts and partnerships can prove beneficial to portfolio companies.
Their background should also include:
- Academic Credentials: Advanced degrees in business, finance, or relevant technical fields provide a strong theoretical foundation and analytical skills.
- Entrepreneurial Experience: Founders or co-founders of startups who have navigated the challenges of building businesses from the ground up typically are well-versed in the value creation process.
- Private Equity or VC Experience: Work history in private equity or venture capital provides insight into investment processes, portfolio management, and the effective use of a VC platform.
How Much Do Operating Partners and Value Creation Teams in PEs Make?
The compensation of operating partners and value creation teams in private equity firms can vary widely based on several factors, including the size and success of the PE firm, their experience and background, and the specific responsibilities of the role. Typically, both operating partners and value creation team members receive a combination of salary, bonuses, and carried interest, which is a share of the profits from successful investments.
- Base Salary: Private equity operating partners and value creation teams generally receive a competitive base salary that reflects their extensive experience and the value they bring to the portfolio companies. According to a report by Heidrick, the salary for operating partners averages at around $600,000 per year, while a value creation associate can earn up to $300,000. These figures could also be more or less depending on the PE firm and the individual’s qualifications.
- Bonuses: In addition to their base salary, these professionals often earn performance-based bonuses. These bonuses are tied to the success of the portfolio companies they support and can significantly increase total compensation. Annual bonuses can range from 20% to 100% of the base salary, depending on the achievement of specific goals and milestones.
- Carried Interest: A key component of their compensation is carried interest, which is a share of the profits generated by the firm’s investments. Carried interest typically ranges from 1% to 3% of the profits, but this can vary based on the firm’s policies and the operating partner’s level of involvement.
- Equity Stakes: In some cases, operating partners may receive equity stakes in the portfolio companies they work with. This means operating partners can benefit directly from the appreciation in the value of these companies.
What Do Operating Partners in Value Creation Teams Do?
Now that we’ve established what operating partners and value creation teams are, let’s explore the roles they play in private equity.
1. Capital Structure Optimization
When a private equity firm steps in, they don’t just inject capital into a company—they meticulously rework its financial setup to reduce costs and increase flexibility. Think of it like refinancing your home loan to secure a better interest rate but on a massive corporate scale.
One strategy private equity operating partners use is forging relationships with banks that offer more favorable terms and conditions, similar to getting a loan from a bank that truly wants to see you succeed.
Example: Take Blackstone’s acquisition of Refinitiv in 2018 for $20 billion, using $13.5 billion of debt[1]. Blackstone didn’t merely buy a majority stake in the former Thomson Reuters business; they restructured Refinitiv’s debt to obtain better terms and optimize its capital structure.
This savvy move reduced the company’s cost of capital, providing more room to grow and improve operations. The result? Less than a year later, in 2019, Refinitiv was sold to the London Stock Exchange Group for $27 billion[2]. Blackstone more than doubled their investment in under a year!
2. Working Capital Management
Working capital management is crucial for optimizing a company’s day-to-day finances to improve cash flow, and it can make a significant difference in overall business health. It typically involves:
- Optimizing Inventory: Think of this like a grocery store always having exactly what you need without overstocking and wasting money on excess inventory. Private equity firms strive to ensure companies maintain the right amount of stock at the right time, minimizing holding costs and maximizing efficiency.
- Streamlining Receivables and Payables: This involves ensuring the company gets paid faster and handles its expenses efficiently. Imagine getting your paycheck a few days earlier and having more time to pay your bills. By renegotiating payment terms with suppliers and service providers, the company improves its cash flow, making it more stable and able to invest in growth opportunities.
Many PE funds usually have a value creation team member, an operating partner, or a dedicated value creation professional working on these areas across the whole portfolio of companies.
Example: Consider KKR’s acquisition of Pets at Home in 2019[3]. KKR proactively implemented strategies to optimize inventory management, streamline receivables, and improve payables processes. This led to enhanced cash flow, reduced inventory holding costs, and improved overall liquidity. As a result, Pets at Home was in a stronger position to achieve sustainable growth, becoming more resilient and better equipped for future challenges.
3. Governance
When a private equity firm steps in, they often make significant changes to a company’s board of directors to enhance governance and strategic oversight. This typically involves appointing experts with deep industry knowledge, including senior operating partners who bring extensive operational expertise.
Private equity operating partners play a crucial role in governance by leveraging their industry experience to provide valuable insights and guidance. They collaborate with the board to set ambitious yet realistic goals and ensure the management team is equipped to achieve them.
Example: Thoma Bravo’s acquisition of Instructure in 2020[4] illustrates this approach. Thoma Bravo strategically added experts to Instructure’s board, providing the strategic insights and operational know-how necessary for the company’s success. This alignment of governance and operational expertise helped drive the portfolio company toward its objectives and enhanced overall performance.
4. Talent Management and Leadership
Talent management and leadership are pivotal in transforming a good company into a great one. Think of a company as a sports team; to win, you need star players and an exceptional coach. Operating partners and value creation teams specializing in talent excel at identifying and recruiting these star players who can drive the company to new heights.
Example: In December 2015, L Catterton, a leading consumer-focused private equity firm, made a significant investment in Peloton[5], a company specializing in connected fitness products and services. Recognizing the need for stronger leadership, they facilitated the recruitment of top-tier executives. William Lynch was appointed as President[6], and Jill Woodworth joined as CFO[7]. They also recruited senior leaders in marketing, supply chain management, and technology.
The results were remarkable. Peloton scaled its operations efficiently, enhanced its product offerings, and expanded its market reach. This new leadership team guided the company through its IPO in September 2019[8]. Even amid the challenges posed by the pandemic, they maintained growth and high customer engagement throughout.
5. Marketing Effectiveness
A successful company creates value not only for itself but also for its customers, and this is where an operating partner’s marketing effectiveness plays a crucial role. In private equity, this often means taking a comprehensive, data-driven approach to ensure every marketing dollar is well spent. It involves:
- Attribution: A key aspect of this process is attribution, which focuses on understanding which marketing efforts are driving results. Meticulous tracking is essential for this process. Usually, a value creation personnel specializing in marketing effectiveness or a dedicated marketing expert brought into the company implements sophisticated attribution models to pinpoint which campaigns are working and which aren’t. This allows for more informed decision-making and optimized marketing spending.
- Growth Strategies: Another key element is developing and executing strategies for organic growth. This could involve expanding into new markets, developing new products, or enhancing existing offerings to better meet customer needs and drive revenue growth.
Example: When the Blackstone Group took over Hilton Worldwide, they made significant investments in digital marketing and revamped the company’s loyalty programs[9]. Their goal was to create an engaging, seamless experience that encouraged guests to return repeatedly. This strategic focus on marketing effectiveness and growth strategies significantly contributed to Hilton’s enhanced customer engagement and overall success.
6. Pricing Optimization
Setting the right price can make or break a product’s success. If prices are too high, customers may turn to competitors; if too low, sales might increase, but potential profits could be missed. By leveraging data and market insights, private equity firms employ pricing optimization to find the ideal price point where customers perceive value, and the company maximizes profits.
To accomplish this, private equity often work with operating partners who have extensive experience in pricing strategies.
Example: When Advent International partnered with Lululemon, they didn’t rely on intuition for setting prices. Instead, they conducted an in-depth analysis of customer behavior, competitive pricing, and industry trends. This data-driven approach helped Lululemon refine its pricing strategy to align with consumer expectations and market demands.
The result was improved profit margins and robust revenue growth. Customers felt they were getting good value for their money, which strengthened Lululemon’s competitive position in the market.
7. Business Development
Business development is a critical focus for private equity funds. Even the smallest funds invest significant effort into helping portfolio companies secure new business. This support can take various forms, such as dedicating a team member from the fund to assist with sales one day a week or assigning an operating partner with a robust industry network. This partner leverages their contacts to shorten sales cycles and facilitate introductions to potential clients and key stakeholders.
Example: If we look at TPG Capital’s investment in Spotify back in 2015[10], TPG played a crucial role in negotiating key partnerships with major music labels and artists. This strategy attracted millions of new subscribers, significantly boosting its market share. It solidified Spotify’s position as a leading music streaming service globally, resulting in a successful direct listing on the New York Stock Exchange in 2018.
8. Data and Analytics
In today’s digital age, staying ahead of the curve is crucial for a company’s success, and value creation teams understand this well. So, they harness the power of big data and advanced analytics to drive business growth and efficiency.
Private equity funds often acquire businesses with outdated systems as they recognize the potential to create significant value through modernization. Oftentimes, these companies either lacked the resources or expertise to employ data scientists, so to address this, many PE funds employ data science professionals as part of their value creation team. These teams are deployed into portfolio companies for weeks or months to extract actionable insights from existing data, be it from customer insights, new product development and market trends, or operational efficiency and cost-cutting.
Example: For instance, when Silver Lake Partners teamed up with Dell to execute a comprehensive digital transformation strategy, at the forefront of their strategy were cutting-edge technologies to streamline operations and gather deeper customer insights.
To learn more about how private equity creates value after buying your business, check out this YouTube video.
9. Buy & Build
A common value-add strategy in private equity is the ‘buy-and-build’ approach. This involves identifying and executing acquisitions to enhance value. Value creation teams play a crucial role in this process, often working closely with the investment team at the private equity fund.
In essence, a fund acquires a smaller company in the same industry as a business they already own, referred to as the “platform acquisition.” The fund then identifies smaller targets that would strategically complement the platform business. This increases revenue through acquisitions (i.e., inorganic growth) and creates synergies, such as reducing personnel in the acquired companies by leveraging the existing team in the platform business.
This strategy can be highly accretive, as smaller businesses are often acquired at lower multiples, while the combined entity is valued at a higher multiple due to its increased size. Additional benefits of the buy-and-build strategy include:
- Expand product offerings and capture more market share
- Gain immediate access to new customer bases and distribution channels without having to start from scratch
Example: A prime example of a successful buy-and-build strategy is Vista Equity Partners and their investment in Marketo. Vista acquired the marketing automation software provider and pursued several strategic acquisitions to enhance its product offerings and expand its market reach. This move resulted in an impressive increase in Marketo’s value, culminating in its acquisition by Adobe for a staggering $4.75 billion[11]. This showcases how value added investors can significantly impact a company’s growth and market position.
10. Exit Planning
Exit planning is the final stage, where all the hard work pays off, and the portfolio company is sold at the right time and under the best possible conditions to maximize returns. Meticulous preparation during this phase helps to ensure that the portfolio company avoids becoming VC orphans—companies that struggle to find the right buyer or exit strategy. Here’s a closer look at how it works:
- Preparation for Sale: This involves optimizing every aspect of the portfolio company’s operations, financials, and strategic positioning to enhance its attractiveness to potential buyers. This includes refining operational processes, ensuring robust financial health, and strategically positioning the company within the market.
- Market Timing: This is about identifying the optimal time and market conditions for an exit—when demand is high and supply is low. Private equity firms analyze market trends, economic conditions, and industry cycles to pinpoint the best exit window. Conversations with investment banks and other market participants play a very big role here.
- Buyer Identification: This step involves finding and engaging with potential buyers who see the value in the company. It can include both strategic buyers (other companies in the same industry) and financial buyers (like other private equity firms). Operating partners are instrumental here and can leverage their industry expertise and connections to attract suitable buyers.
Example: Apollo Global Management exemplifies the art of timing exits, particularly when buying distressed businesses and selling them at a more favorable point in the economic cycle. When they acquired McGraw-Hill Education, they actively worked to optimize its operations, enhance its financial health, and strategically position it for sale. All the same time, they kept a close eye on the market and exited it perfectly to a consortium led by Platinum Equity.
Closing Remarks
Private equity operating partners and value creation teams play a crucial role in driving the success of portfolio companies. Their combination of strategic insight, operational expertise, and industry connections uniquely position them to unlock value and promote growth. By focusing on long-term improvements and leveraging their extensive experience, value creation teams ensure that portfolio companies are not only prepared for successful exits but also thrive in their respective markets.
As the US and international private equity landscape continues to evolve, the significance of operating partners and value creation teams will only increase, highlighting their impact on achieving superior returns and sustainable business success. Through their dedicated efforts, they continue to revolutionize the way private equity firms realize and enhance value, ultimately shaping the future of the industry.
FAQ
An operating partner focuses on the operational and strategic aspects of portfolio companies, using their industry expertise to drive growth and improve performance. On the other hand, a general partner is primarily responsible for raising capital, managing investments, and overall fund performance. GPs oversee the investment process while operating partners work directly with portfolio companies to enhance value.
Operating partners are typically compensated through a combination of base salary, performance-based bonuses, and carried interest. The base salary can start at $150,000 if its somebody on the junior end or a couple days a month. For former executives of similar businesses the base usually starts at $400,000 with the majority of the compensation being paid in performance bonuses and as part of carried interest.
Operating partners focus on improving portfolio companies’ operations and strategic positioning. They work on areas such as operational efficiency, financial management, and market strategy. They leverage their industry experience and networks to address challenges, drive growth, and prepare companies for successful exits.
References
- https://www.blackstone.com/news/press/blackstone-led-consortium-completes-partnership-transaction-with-thomson-reuters-for-financial-risk-business/[1]
- https://pitchbook.com/news/articles/blackstone-to-take-on-bloomberg-after-london-stock-exchange-buys-refinitiv-for-27b[2]
- https://www.theguardian.com/business/2010/jan/27/pets-at-home-sold-for-1bn[3]
- https://www.prnewswire.com/news-releases/thoma-bravo-completes-acquisition-of-instructure-301028910.html[4]
- https://www.prnewswire.com/news-releases/peloton-receives-75-million-growth-capital-investment-from-catterton-the-leading-consumer-focused-private-equity-firm-300186515.html[5]
- https://www.businesswire.com/news/home/20170209005317/en/Peloton-Appoints-William-Lynch-as-President[6]
- https://www.prnewswire.com/news-releases/peloton-names-jill-woodworth-as-chief-financial-officer-and-bolsters-its-senior-team-across-key-business-functions-300636010.html[7]
- https://www.prnewswire.com/news-releases/peloton-announces-pricing-of-initial-public-offering-300925649.html[8]
- https://stories.hilton.com/releases/hilton-marks-a-decade-of-growth-since-initial-public-offering[9]
- https://techcrunch.com/2016/03/29/stream-with-the-devil/[10]
- https://www.cnbc.com/2018/09/20/adobe-confirms-its-buying-marketo-for-4point75-billion.html[11]
