Operation Value Add (Part II)

As the private equity industry matures, PE firms bat around terms like “operational expertise” and “value add” as a way to distinguish themselves from the sea of competitors, and also justify their existence. (If you’re not adding something, what exactly are you all doing?)
But what do those terms even mean? And further, how do you execute on them? I went to Capital Roundtable’s “Adding Value to PE portfolio companies” Masterclass to find out. Here is the first installment in case you missed it.

In the second part of my coverage, I’ll address the issues involving the way firms place their operations people within their organization.

Note: I wasn’t given permission to quote anyone specific, so I’ll have to attribute these insights to nameless panelists, presenters and attendees at the event.

So, despite the influx of firms announcing “operational hires” or even just the intention of beefing up their “operational staff,” I gathered that most private equity firms do not keep a regular stable of in-house operators. Instead, they spend lots of time and money cultivating networks of well-connected, semi-retired executives who might only want to work a few months a year. These parachute CEOs are apparently ready at a moments notice for the panelists’ firms. But also, they’re in high demand, and one buyout professional said his firm shells out as much as $1 million per executive to search and recruitment firms.

How do you compensate non-full time operating partners? Generally, avoid keeping them on retainer unless it’s at the request of the deal team. “The biggest carrot is carry,” one buyout pro said. Beyond that, the executives are often given equity alongside existing management. Either way, every firm agreed that no one blanket rule works. It’s best to negotiate with each individual operating partner.

Since they’re off-balance sheet, how do you keep them ready at a moment’s notice? One LBO pro said the best way to find and keep strong networks of operating partners is to build friendships with as many full time partners as possible. “We start with lists of people we know, like and trust,” he said. “Then we move narrow that down to people with demonstrated success.” The firm does diligence on the partner the same way it does diligence on a deal, he said.

Check out this somewhat related article on serial managers by Jeremy Harrell, the Managing Editor of Buyouts: Keeping Serial Managers in the Fold