Operating partners: a growing breed

Operating partner is a term being used more frequently in the buyout space, but private equity firms have different takes on what the role entails. Angela Sormani looks at the rationale behind these appointments and who is driving them.

Jan Faber, head of fund investments at Henderson Private Capital, talks of the buyout industry mirroring the venture landscape. He says operating partners in buyout firms are becoming more like the venture partners VC firms employ to monitor their portfolios and source deals. Many VC firms have venture partner programmes to broaden their access to the entrepreneurial community. These venture partners help identify potential companies that fit the VC’s profile through their extensive networks. This, in some cases can also be the role of the operating partner in a buyout firm.

But, stresses Faber, it would be risky if GPs started bringing in operating partners just because institutional investors demanded it. Faber suggests some firms even set up industrial advisory boards to appease their investors and which might not be as involved in the investment process as the investors are led to believe.

He says: “It’s a model which isn’t for everybody. There is sometimes a bit of confusion in terms. An operating partner would suggest someone who is part of the partnership and has a share of the carry. Many do play a role in deal sourcing, but the role of an operating partner is sometimes just sitting on the board of a portfolio company.”

Duke Street Capital is one firm that has been building a team of operating partners to enhance its portfolio management. Most recently the firm hired David Williams as operating partner, with a focus on consumer facing investments. His most recent role was as chief executive of the Thresher Group, where he led a significant turnaround in profitability of the group. His appointment follows the recent announcement of three other additions to Duke Street’s growing team of operating partners, that brings bringing the total number to 12. These partners work between 50 and 100 days a year and provide Duke Street with top-level industry expertise on deal origination, investee company management and development of strategy.

Peter Taylor, chief executive Duke Street Capital, says: “More players are talking about the role of the operating partner. I don’t think in the mid-market we are seeing many of our competitors doing anything like this. Part of the advantage of having a small portfolio like ours is that the operating partners have a much more intensive role.”

Taylor sees Duke Street as having more similarities with the approach of the larger US buyout houses such as Clayton, Dubilier & Rice (CDR) and Compass Partners, some of which employ full-time operating partners. In terms of Duke Street employing such a professional on a full-time basis, he says. “I am not sure how that works. These guys are free spirits and not used to being tied down to one position.”

CDR has always operated with an equal number of operating and finance partners. These are seasoned industry executives who have proven records of running large companies and will have at least 20 years’ experience before they join the firm. These professionals will often have an important role in portfolio management. CDR will buy a business and treat it as a subsidiary, bringing in the operating partner to sort out the business. With underperforming portfolios in particular, this approach is becoming increasingly common and a preference for limited partners.

UK mid-market firm ECI Ventures takes yet another approach with its independent chairman programme. Richard Chapman explains the firm’s mindset: “Whenever we do a deal we like to have an independent chairman. They bring a lot to the business and a form of discipline to the whole process, it’s almost like an extra form of due diligence. These professionals normally invest their own money in the transaction alongside us and so have a shared interest in seeing the business do well. It is almost a partnership approach, you have an equal interest in the company performing well.”

In many firms the role of the operating partner is just as important at the beginning of the process, in sourcing investments, as once the investment is made and the business plan needs to be executed. It is a different role to being a purely financial partner. Toby Boyle of Henderson Private Capital explains the role of the operating partner within the team’s direct investment programme: “Operating partners work with us on a number of deals. We have a view that operating partners are very important, both in deal origination and how we assess and monitor deals. Henderson’s European private equity business has an operating partner based in each of the UK, Italy and Germany. They are not managers of our investee companies, they have an active non-executive role.”

Boyle stresses that the key qualities Henderson looks for in operating partners is not just industry experience. “There needs to be some familiarity with private equity and they need to deal closely with the GP on a regular basis. There has to be an active dialogue and the partner needs to be a part of the team although they will probably have other interests as well, but that is a good thing, as they will have wider experience and broader networks,” he says.

Operating partners are undoubtedly gaining a higher profile in the buyout space and Boyle supports this. “I think it’s the way the private equity industry is definitely going. It’s also important to find the right people and not just well known names; you need active professionals. The LPs are being more sophisticated now and are looking closely at this whole area.”