The operating partner model has gained in popularity over recent years and is widely employed by private equity firms as a means of creating value. Operating partners bring their expertise to portfolio companies, leverage specialized knowledge in respective industries, and remain operationally involved post-purchase. However, these trusted advisors who draw the confidence of management teams and limited partners have seemingly become the bane of private equity.
A recent PE Hub column by Ryan Caldbeck entitled “Private equity’s dirty little secret: why operating partners don’t make sense,” claimed that operating partners often lack the expertise to help nascent, fast-growing companies. Caldbeck stated that operating executives rarely “bring the specific experience, or the range of experiences, to address the broad array of situations and challenges portfolio companies face.”
We at Soundcore Capital Partners LLC, a control oriented private equity firm, believe Caldbeck is wrong. Our operating partners are able to successfully transfer their C-suite experience to the high-level, change-oriented thinking of the PE world. These professionals add great value in the due diligence process, assist with strategic planning, and often supervise portfolio company initiatives post close. Additionally, our operating partners bring propriety deals that are not being marketed, to our attention.
Caldbeck, in his column, wrote that the majority of operating partners are generalists. This basically makes them useless, he said. At Soundcore, we believe the statement to be baseless. As a value-focused PE firm, we look for seasoned operating partners who are often prior CEOs and COOs who can leverage their expertise to our benefit. Moreover, our operating partners come with very specific industry experience and a history of working with companies in preferred size ranges.
Many PE firms do not take advantage of partnering with industry-specific, in-house operational members. Instead, firms often recruit operating partners on a deal-by-deal basis. Interim partners may be unaware of the dynamics within deal teams. Collaborating with operating partners from the onset of a deal can encourage mutual understanding, allow for process short-cutting, and increase efficiency.
At Soundcore, whenever we source a new deal, we always look to our operating partners to weigh in. Recently, one of our operating partners, Harry Vinson, led the due diligence process for the potential acquisition of a company in the paper and packaging space – a field of his expertise. He provided valuable insight on potential operational improvements to increase productivity, evaluated the leadership and management, drafted a potential timeline for growth, sourced potential strategic add-ons from within his professional network, and provided Soundcore with a comprehensive SWOT analysis. Vinson’s expertise, which our other operating partners have in their specific fields, exemplify the knowledge such executives bring to private equity firms. They are by no means generalists.
Further, in an Egon Zenhder article, author Claude Shaw writes about the implications of the operating partner for PE firms. He emphasizes an important Soundcore principle: Increasing management quality at the portfolio level is an “unbounded change” that helps enhance the likelihood of continued value-creation. The article quotes Seth Brody, operating partner at Apax Capital, who says that building trust with an entire management team takes effort.
“You have to have the skills and invest the time in those relationships to truly create value. You and the CEO are really working for each other,” he says. Our operating partners are highly effective at using empathy to deal with the concerns of deal partners. As perfectly summarized by Shaw and Brody, these professionals strike a balance between acting and listening in a way that allows them to oversee on-going value creation in partnership with the deal team.
From applying industry expertise during due diligence to building long-term relationships with sellers, operating partners should be looked at as experts in the private equity transaction process. At Soundcore, we believe that the opportunities for value creation within a diverse portfolio of companies are countless and our in–house partners are well poised to help us realize them.
Jarrett Turner is a managing director of Soundcore Capital Partners
Photo credit: Shutterstock