Opinion: Do PE firms formed by industry experts still need PE talent?

Are we on the cusp of seeing a crop of firms built and led solely by operators, with no investment talent?

So what happens when a private equity firm doesn’t need private equity talent anymore? Is that a thing?

I’ve had a few, let’s say, theoretical discussions about the rise of firms led by operators, sector experts that came from the corporate world, where they led divisions and actually rolled up their sleeves and did stuff, with very little if any investing experience.

The discussion arose in the context of Crosspoint Capital, an emerging manager run by specialists from the cyber world, which raised $1.3 billion for its debut fund. Crosspoint, formed in 2020, brought on Ian Loring, who formerly co-led tech investing at Bain Capital, as the senior private equity talent on the team. Unexpectedly, Loring left earlier this year, which meant Crosspoint no longer had an exec in its leadership team with a private equity background. The firm does have PE muscle in its managing director tier, including two who joined last year: Laura Grattan, from Thomas H. Lee Partners, and Dan Stanko, who came from HGGC.

It’s not clear to me if Crosspoint is looking to replace Loring with new PE talent (they’re not talking, natch). But the situation led to this discussion – do a team of operators need a PE person?

A few firms follow a model where they provide the operational talent, and invest alongside larger firms that provide the financing and deal muscle. Motive Partners comes to mind as a firm that invests alongside larger sponsors. (To be clear, Motive has a bench of pure investment talent).

These firms have the ability to come into a buyout to upgrade, monitor or even run the operations, almost as if the larger sponsor partner in the deal is renting the talent, allowing the smaller firm to co-invest into the deal.

The question became, are we on the cusp of seeing a crop of firms built and led solely by operators, with no investment talent? That seems unlikely, not least because LPs tend to want to see some kind of investment experience even if a firm is geared toward operations.

“You kind of want a real deal person around the hoop,” one LP told me. A second LP said: “Most LPs, when they deploy capital with a group, really want to see proven private equity investment experience, not just operating experience.”

However, the LP added: “The art of the deal, running models, performing due diligence, negotiating terms, it’s all pretty commoditized. You’re not making a ton of money in private equity just doing that.”

Firms are differentiating themselves through sector expertise and bringing operators onto deal teams. And some new firms are leaning into operating talent. “Here are some smart industry executives, they’re going to create their own firms. Maybe they don’t have deal experience, but [large firms] are happy to partner with these guys.”

It’s an interesting concept, but not one that is likely to become the norm in private equity. Sector expertise and operating experience have become important aspects of a firm’s offering; however, private equity investing talent will still lead the way.