GP Profile: Advent Ramps Up Operating Partner Program

It wasn’t long ago that LBO shops could generate decent returns with hardly any expertise of how their businesses operated day-to-day. And it’s still possible.

Nevertheless, the general direction of the business has been for buyout firms to become ever more hands-on, and having former executives on your payroll is almost a prerequisite. Perhaps no firm is in the process of ramping up its operations team as dramatically as Advent International, the Boston-based firm with more than 140 investment professionals across 22 countries that is investing out of its $10.4 billion sixth global buyout fund.

Conor Boden, who earlier led an operating team for 3i Group Plc, the London-based private equity firm, has taken the helm of the Operating Partner Program at Advent with a goal of attracting top talent and of sending a message that it takes its operational approach to investing very seriously. “I was hired from 3i because there was recognition across Advent that our relationships with operating partners had contributed value to a number of portfolio companies,” Boden said. “It’s a key competitive difference.”

Firms of all shapes and sizes in recent years have turned to “operational expertise,” in buyout-speak, to gain a competitive advantage. Irving Place Capital, a firm investing from a $2.7 billion fund, employs nine former executives, including Phil Yates, who has more than 30 years in the packaging industry, as senior advisors. Kohlberg Kravis Roberts & Co. launched KKR Capstone, its consulting arm, in 2000 and the group today boasts 40 professionals from a broad swath of industries that help management at KKR companies control costs while pushing growth.

Advent has announced nine hires to its operations team this year alone across a variety of industries, and the program has doubled to more than 70 professionals since Advent gave it a boost in January 2008 when it hired Boden from 3i. “It’s not unique to private equity, but the depth and maturity of their program is pretty differentiated,” said Yann Robard, a London-based senior principal with CPP Investment Board, the investment manager of the Canadian Pension Board and an investor in Advent’s fourth, fifth and sixth buyout funds. “In my mind, it’s undoubtedly helped them generate outperformance.”

Recent hires include Richard Atkins, the former head of IBM Corp.’s global services unit in Europe, where he oversaw 18,000 employees. Atkins advises Advent on deals in software, Internet technology and telecommunications. Michael McShane, the former CEO of Grant Prideco, a Texas-based oil and gas equipment and services company, advises the firm on deals in the oil and gas services industry. And Bob Wigley, a former Merrill Lynch executive in Europe and a board member of the Bank of England, advises the firm on financial services investments in Europe (see adjoining chart for detailed list of recent hires).

Outside of the United States, Advent has hired operating partners to expand the firm’s existing presence in more high-growth countries. In July the firm hired P. Jayendra Nayak, the former chairman and CEO of Axis Bank, the third largest private bank in India, to source financial services in that country, where Advent has made one investment. Looking ahead, Advent executives plan to continue expanding the Operating Partner Program in areas such as consumer products, business-to-business services in Europe, and medical technology.

The Payoff

Advent is obviously looking for every edge to continue to produce exceptional returns for investors. Its fifth fund, a $3.7 billion pool closed in 2005, has already returned a solid 1.5x what the California Public Employees’ Retirement System invested in it. The firm’s fourth global fund, a $1.93 billion pool Advent closed in 2002, has fared even better, so far returning 3.1x the $25 million CalPERS invested while generating a 52.3 percent net internal rate of return as of March 31. In 2008 the firm realized $2.4 billion in proceeds from the full or partial sale of more than a dozen investments, while investing $2.3 billion in 14 companies.

The added emphasis on operations could already be paying off. In the past, the firm relied on its operating partners to manage its portfolio companies. But since formalizing the program under Boden, Advent has come to rely on them to source deals as well. In one recent example, Pam Patsley, a former executive at First Data Corporation who Advent hired in 2008, sourced the firm’s $561 million acquisition in June of Fifth Third Bancorp’s payment processing unit. In another, Jenny Ming, the former president of clothing retailer Old Navy who Advent also hired in 2008, played an important role in the firm’s $370 million buyout of teen clothing retailer Charlotte Russe in October.

The experience these professionals bring to deals helps Advent professionals better understand industry dynamics influencing targets and affords the firm more credibility with sellers, said Stephen Hoffmeister, a Boston-based managing director. He noted that Operating Partner Tom Karol, a longtime executive in the roofing materials industry, introduced him and other Advent professionals to management at Bradco Supply Co., an Avenel, N.J.-based distributor of roofing supplies that the firm bought in August 2008.

As the former CEO of ElkCorp., one of the largest manufacturer’s of roofing materials, Karol was familiar with Bradco because it was one of ElkCorp’s customers. He saw an opportunity to improve the company’s performance by paying less for its raw materials, retraining its sales team, and expanding revenue to $3 billion from $1.6 billion by adding siding and windows products to its product portfolio, Hoffmeister told Buyouts. Thanks to a deep knowledge of some smaller distributors in the market, Karol also brought his own list of add-on acquisition targets, which overlapped with Hoffmeister’s. “These are hard things for investors to pick up; they’re qualitative and require some faith and without an operating partner who’d done it before it’s hard to do that,” Hoffmeister said. “He saw the potential there that we may not have seen ourselves.”