Operating partner (Ofer Abarbanel online library)

An operating partner is a term used by venture capital (VC) and private equity (PE) firms to describe a role dedicated to working with privately held companies to increase value.

The role was created by large capitalization private equity groups and the importance of driving corporate change in building value increased as sellers became more sophisticated and financial engineering less central to private equity investments in the 2000s.[1] . Firms with such Operating Partners argue that value creation potential is better achieved by a fully dedicated and senior partner than solely relying on external consultants. An operating partner has evolved into a full-time position drawing a combination of salary, performance bonus and carried interest similar to an investment partner in the portfolio investment.[2]

Definition

Operating partners are proven business leaders, functioning as either generalists or specialists, and have established track records of building shareholder value. They are usually more capable of developing strategies and leadership teams than a deal-oriented partner, and they are expected to spend more time levering their professional networks to successfully improve portfolio company value.[3] They are usually former CEOs, COOs, CROs (Chief Revenue Officers), or CFOs with significant deal experience in general or in the VC or PE’s target industry(es). They typically focus on strategic planning, commercial growth, operational efficiency and financial controls, and lever their analytical and industry experience to solve problems facing portfolio companies.[4]

Role and Responsibilities

The role of an operating partner can span the full investment cycle, from due diligence to post transaction integration through to a liquidity event or full exit event.[5] Operating partners are levered by investors and boards as a catalyst for change, as coaches or mentors and in some cases, to serve as “sparring partners” for management. Operating partners may oversee short to medium term as well as long-term operational improvement programs for a portfolio company. They may also support management in day-to-day operations as interim management, board members or as external advisors.[6]

The role of an operating partner should not be confused with the role of a venture partner or an entrepreneur-in-residence. A Venture Partner is a non-salaried external resource who is expected to source and play a significant role in a few or more companies over the life of a fund, receiving salary and stock options directly from the target company. An Entrepreneur in Residence (EIR) is similar to a venture partner, but differs in that the person works on only a single company, and typically steps into the company as the full-time CEO, CFO, or other C-level position.

Value

All VC and PE firms seek to maximize the value of their investment. In recent years, the industry has experienced increased pressure to drive operational value creation – in other words, shifting focus from leverage and multiples arbitrage to increasing the fundamental financial, operational and commercial performance of their invested portfolio companies. As a result, operating improvement must translate into increased enterprise value, in order to yield higher investment returns. Hence the new partnership triad between general partners, limited partners and operating partners.[7][8]

Types of Operating Partners

Operating partners use their specialized skills to create enterprise value by improving their portfolio company’s cash flow or increasing its valuation multiple. The types of operating partners include:

Digital Operating Partner

The private equity digital operating partner is a business executive with experience in strategy, science & technology and operations. Their role is to create enterprise value by identifying, planning and managing the execution of digital initiatives. This process is often referred to as digital transformation. Although any type of technology (high, mid, low) can be applied to any type of company, digital transformation generally refers to the process of using high technology (the Internet of Things (IoT), Data Science (Analytics & AI), the Digital Twin, sensor fusion, AR and Blockchain) to transform traditional companies into digital-traditional companies.

Notable Operating Partners

  • Jack Welch was appointed as an operating partner at Clayton, Dubilier & Rice following his retirement as CEO of General Electric[9]
  • Charles Giancarlo was appointed as Managing Director and an operating partner at Silver Lake Partners following his departure from Cisco Systems Inc where he was CDO and President of Linksys[10]
  • Richard Baker was appointed an Operating Partner at Advent International having previously served as CEO at Boots plc and COO at Asda
  • Mark Gillett was appointed as Managing Director and an operating partner at Silver Lake Partners following his departure from Microsoft where he was a CVP and served as COO and CDO of Skype[11]
  • Thomas Ryan is an Operating Partner at Advent International which he joined after stepping down as President and CEO of CVS Health
  • Bob Swan Prior to assuming the CEO role at Intel, served as an Operating Partner at General Atlantic[12]
  • Gary M. Reiner is an Operating Partner at General Atlantic since 2010[13]

References

  1. ^Star, Marlene Givant. “Private Equity Groups Focus On Operations To Combat Lean Returns”. Forbes. Retrieved 12 Jan 2014.
  2. ^Brigl, Michael. “Private Equity: Engaging for Growth: The 2012 Private-Equity Report”. BCG Perspectives. Retrieved 13 April2012.
  3. ^Quarta, Roberto. “The Operating Partner: an Industrial Approach to Private Equity Investment” (PDF). Clayton Dubilier & Rice. Retrieved 11 April 2012.
  4. ^Brigl, Michael. “New Operating Models”. BCG Perspectives. Retrieved 11 April 2012.
  5. ^Quarta, Roberto. “The Operating Partner: an Industrial Approach to Private Equity Investment” (PDF). Clayton Dubilier & Rice. Retrieved 11 April 2012.
  6. ^Hemptinne, Coralie. “The value of in-house operation teams in private equity firms” (PDF). INSEAD. Retrieved 11 April 2012.
  7. ^Brigl, Michael. “Private Equity: Engaging for Growth”. BCG Perspectives. Retrieved 11 April 2012.
  8. ^Favaro, Ken. “The Next Winning Move in Private Equity”. booze&co. Retrieved 11 April 2012.
  9. ^http://www.prnewswire.co.uk/news-releases/jack-welch-becomes-a-special-partner-of-clayton-dubilier–rice-156565835.html
  10. ^http://www.lightreading.com/ethernet-ip/routers/giancarlo-quits-cisco-paddles-to-silver-lake/d/d-id/650526
  11. ^http://allthingsd.com/20131028/top-skype-exec-mark-gillett-departs-microsoft/

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