In 2021, dealmaking was at a record high with M&A volumes hitting USD$5.9 trillion, according to JP Morgan. However, just three years later, the world is a very different place. World events, financing challenges and general uncertainty in the economic space has meant that private equity firms have had to rethink how they work and the people they bring into the workplace, particularly when it comes to operating partners. Associate Director, Mark Scollay, takes a look at how both operating partners and private equity firms can work more effectively and be successful for all parties.
Operating partners (OPs) can provide a wealth of experience and knowledge to a firm and their portfolio companies, and most private equity (PE) firms know this, however, there’s still a lot of caution exercised when it comes to onboarding an OP. The most common concern raised in our interviews was the fear of ‘getting it wrong’, which inevitably led them to putting off hiring an OP until the very last minute. OPs are then parachuted into tense and difficult situations with limited resource, leadership back up and a lack of clarity of what the role does and doesn’t require, leading to frustration on both sides.
The role of an operating partner is a unique one, and is a position that doesn’t come with its own typical hiring strategy. With the majority of boards and senior leaders generally leading tight work schedules, how do you attract the right OP for your firm and portfolio companies when time is already constrained?
Having spoken with a number of professionals and businesses across the private equity industry, we identified three key areas that private equity firms need to focus on when hiring an operating partner- and ensuring their success.
Defining the problem and communication
What is it that your business and your portfolio businesses need? Start with this and then outline the skills you need and the experience you would envisage the person to have. As obvious as this sounds, when you hire last minute much of what you realise you need ends up getting missed in the busy-ness of getting someone in quickly.
Start the hiring process early and communicate. Don’t leave it to the last minute, pre-empt the hire, the resources they’ll need and ensure that everything you have identified in terms of skillset and requirements is communicated. Instead of bringing someone in after the deal, consider bringing them in earlier in the deal process so that they can provide as much value as possible. This also gives the OP an opportunity to ask questions and understand all aspects far more quickly and easily.
Getting it right from day one
Many of the operating partners we spoke with commented that they were often ‘parachuted’ into a business with very little background, introductions or confirmation of expectations, leaving many to figure it out along the way. This not only hinders internal relationship building and ultimately the success of the deal or project.
“Being brought in to help with due diligence is more effective than being foisted onto the company post-deal”
– Operating Partner
Operating partners have limited hours working for a business and need to bring value from day one, so make sure they have what they need and provide support where you can. Whether that’s giving them extra business resource or a space to share and test ideas. Despite having excellent interpersonal skills, industry experience and strategic vision, a board and senior leadership team know their business, people and how they work, better than someone who’s been ‘parachuted in’ from another company. Keep communication channels open, and ensure it’s kept as a two-way street so that both parties can share. Effective relationships in this role is key if the private equity firm, portfolio companies and the OP are to be successful.
Compensation
This is by far the trickiest aspect of appointing an operating partner, and is what firms struggle with the most. There isn’t a generally accepted rule of what a compensation package typically looks like, so our advice is to look at the following:
- What timeframe are you looking at? Are you looking to bring someone in ad-hoc or on a longer-term basis?
- How many days a month do you require someone for in-line with the outcomes you want delivered? Starting with outcomes and working backwards will give you an idea of length of engagement and what you need per month from a professional.
- From our interviews, not all companies consider co-investment, if you do, be clear about the expectations of the person co-investing, and if not, be clear that it’s not included.
- Ask for advice. Getting outside advice can help give a clear and unbiased view of your situation and help you consider ideas that you may not have considered. We’ve worked with a wide range of firms and professionals and can help scope out, define, identify and attract talent as well as negotiate terms globally.
The full results of our research can be found in our latest white paper, From Metrics to Exits and Beyond – Formalising an Operating Partner Strategy, where we layout each part of formalising your own strategy to suit your business and its needs. Download your copy using the link above and if you have any feedback or insights you would like to share, reach out to us directly.
To discuss your current situation or to understand the current private equity or operating partner landscape in relation to hiring, contact Associate Director, Mark Scollay at [email protected].
