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The role of operating partners in private equity-backed companies

… continued from Private equity executives and operational or industry sector experience

Private equity is such a closed industry club that they don’t know many people outside their own pool. Firms shouldn’t hire people with operational background as investment managers, but search out the best in the business in particular functional areas (sales, marketing, finance, etc) and bring them into their fund as roving operating partners.” – CFO, Business Services sector

As you would expect, operating partners need to have relevant senior managerial and sector expertise as well as strong interpersonal skills. Further, if they are really plugged into the private equity firm and have built up a mutual understanding through working together over time, this can make a real difference in the efficiency of how decisions are made.

Even people with stellar business backgrounds do not always work successfully in a private equity environment. They need a certain amount of confidence and emotional intelligence

to cope with being challenged by the bright, young, driven individuals who work in private equity. Being an ex-chairman of a FTSE 100 company does not count for that much – they have to earn the respect of management and private equity backers.

Qualities of operating partners

Certain pitfalls can arise in using operating partners who:

  • Have ambitions to run rather than just advise the company.
  • Are not insiders in the private equity firm so don’t understand the management structure and where the decision-making power lies.
  • Defer to the private equity firm rather than acting as an independent adviser.
  • Don’t appreciate that all companies are different and what worked before might not be applicable in this situation.

Operating partners or non-executives may become too engaged and think they are supposed to be running the business. It’s up to private equity backers to make this clear at the outset so that management don’t think they’re being superseded.

In today’s climate, the model where there is greater operational input is best suited – management needs help to go through difficult times.” – CEO/Operating Partner, Packaging sector

The board

According to David Williams, Serial Chairman and Chair of Operating Partners at Duke Street, the ideal make-up of a board is:

  • A chairman with relevant sector experience,preferably one who works as an operating partner for private equity backers.
  • A senior director from the private equity firm and usually a more junior colleague for back-up cover.
  • Key executive management.
  • An independent NED with sector-specific knowledge.

The board needs a balance of skills; for instance, it can sometimes become overweight in financial skills and this needs reining back. Consider that executive management is much more important than the rest of the board – they are fundamental to the success of the business.

Those with operational or managerial experience can bring a lot to the boardroom table, and make a real contribution to the people issues and challenges of running a business.

According to Ken Brotherston, Directorbank’s Executive Chairman:

We believe that having the right blend of skills, from a variety of internal and external sources, means that private equity’s input is likely to be more effective which, in turn, drives higher investment returns. Those firms that get the balance right and interact most effectively with management are likely to increase their chances of outperforming the industry average.”

Download the full report: [download id=”3″].

David Okwara

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