A Look at How to Recruit Top Operating Partners
February 16, 2024 – In recent years, the highly competitive deal market has shifted the private equity industry’s emphasis away from financial engineering and put pressure on firms to drive operational value growth in their portfolio companies. As a result, operating partners, whose job is to facilitate on-the-ground value creation, have become key components of investment strategy for many firms, according to a recent report from ZRG Partners’ Kevin Anderson.
Over the past decade in PE, ZRG has seen lessons learned and best practices push towards an integrated/active role in the portfolio companies. “A player/coach relationship that can step in if needed in a distressed situation,” Mr. Anderson said. “We no longer see an operating partner generalist. Today, operating partners are hyper-focused on providing guidance in specific industries, functions, and use cases. Our firm has learned a great deal over decades of conducting operating partner searches and evaluating the success of our placements over time. In the operating partner searches, our clients require C-level and board experience with proven executives who have multiple exits with positive outcomes. The combination of industry and work experience brings the pool of candidates from hundreds down to dozens.”
In regards to what operating partners do—they work intimately with portfolio companies to create value—there is widespread disagreement about who makes a good operating partner and what mix of analytical, experiential, and temperamental qualities are predictive of success in the role, according to Mr. Anderson. “As the primary liaison between a private equity firm and its portfolio company, an operating partner ensures that the portfolio’s executive team has the people, processes, and tools it needs to meet the goals established by the PE firm’s investment thesis,” he said.
Mr. Anderson explains that though the role requires extensive operational leadership experience—the exact requisites vary according to the industry and the expertise gaps in the management team—an operating partner’s essential tools are communicative: They assess, oversee, socialize, and guide the executive team in the execution of its strategic plan. “Poor communication can cause schisms between the deal team and the portfolio company, and these schisms often translate into losses,” Mr. Anderson says. “Misalignments about investment thesis, strategy, performance expectations, and timelines can lead—for example—to unplanned CEO turnover, which often negatively impacts internal rates of return, lengthens hold time, and erodes performance and morale.”
“Communication and clarity are key, not the investment thesis at the operating company level,” said Michael A. Sicuro, current chairman of mCloud and former private equity operating partner and PE portfolio company CFO. “The operating partner’s job is to make sure the executive team has the people, process, and tools necessary to execute while being mindful of the PE firm’s thesis and objectives. He or she should be laser focused with keeping the management team on track and helping them get back on track if needed. They should also be a key liaison in resolving disagreements or misunderstandings between the exec team and the firm.”
Executive recruiters say that operating partners must have the experiential and analytical skills of successful CEOs or C-suite executives, but the temperamental skills and leadership styles that make many such executives successful—e.g., decisive decision-making—differ significantly from those employed by the most effective operating partners. “For this reason, finding a new operating partner often requires more legwork than finding, say, a new CFO, where the role and its prerequisites are clearly defined,” Mr. Anderson says.
In looking for a new operating partner, Mr. Anderson has found it helpful to consider the following core competencies and experiences.
Portfolio Company CEO Experience
In order to advise CEOs from a position of knowledge, it helps for operating partners to be personally familiar with the experience of running an institutionally backed portfolio company, according to Mr. Anderson. “This is a basic communication-as-empathy paradigm, people who know how it feels to work under a private equity firm’s oversight, implement its investment thesis, follow its timelines, and facilitate its exit are better positioned to guide others through the same process,” he says.
Kevin Anderson, a managing director in ZRG’s Dallas office, is a member of the global technology practice. His focus is in the communications, software, and hardware industries within private equity portfolio companies. Mr. Anderson specializes in board-driven executive searches, including board directors, CEOs, CFOs, and other C-suite executives, as well as private equity investment professionals and operating partners. While his search experience spans a range of technology sectors, his core expertise is in communications, hardware, and software.
“Conversely, operating partners without experience working with institutional partners or managing a board may struggle in the role,” said Peter Freeland, founder and managing partner at Unbundled Capital. Quite simply, Mr. Anderson explains that former portfolio CEOs now working as operating partners probably know what it’s like to be on the receiving end of poorly communicated plans or unreasonable demands, and this memory can inform their ability to set realistic expectations among the investment team, carefully socialize strategic changes in the portfolio company, and, most importantly, adapt both expectations and strategy to continually reflect on-the-ground realities.
As Steve Dyke, founding partner at Align Capital Partners, said: “The ability to come in and quickly establish rapport with a CEO and senior management team is critical for an operating partner. The best way to do that is to demonstrate that you’ve sat in their seat before, had success, and are willing to listen to them.”
Furthermore, Ray Hood of Guidepost Growth Equity also notes that: “Most companies prepare annual budgets and historical financial statements. While critical to operating the business, they aren’t enough to fully capture the intentions and plans for the company. Preparing an annual written plan that is shared with top management and employees and updated quarterly is critically important, especially for smaller, fast-growing companies.”
The negatives? “As mentioned, former CEOs may need to adapt to a new change methodology, learning to lead by persuasion rather than by directive,” Mr. Anderson said. “Also, operating partners travel rigorously, and it can be difficult to coax former CEOs to embrace this schedule. At the same time, PE firms should avoid bringing on late-career back nine operating partners who are protective of their leisure time. The role is demanding and it’s not for everyone.”
Consulting Experience
Even if this skill has to be dusted off before use, Mr. Anderson notes that operational executives who have experience (however distant) in management consulting tend to be quite good at making the transition from an executive to an advisor.
Related: How Talent is Driving Private Equity Success
“Consultants are generally skilled at selling difficult advice to their clients,” he said. “Also, current or recent consultants will better acclimate to rigorous travel schedules. Of course, the ideal operating partner candidate will possess management consulting and portfolio company CEO experience; however, former consultants without private equity or portfolio company backgrounds can learn to excel in the operating partner role as long as they have experience as an operational executive; they may, however, require an adjustment period.”
“The most successful operating partners we’ve hired understand that they’re not there to run the portfolio company themselves, but rather to work with, mentor, and influence the management team,” said Mr. Dyke. “We’re not looking to turn CEOs into general managers. Thus, an ability to work collaboratively with an existing team is imperative to being a successful operating partner.”
Board Experience
Current or former board experience is a great indicator of success in the operating partner role. “References as to how productive the candidate was in both board [and consulting] roles are incredibly important,” said Mr. Freeland. “Seek validating data points that CEOs have received valuable contributions from the candidate and their relationship was authentic and beneficial.”
There are several reasons for this, according to Mr. Anderson. “First, operating partners with board experience have the experiential tools to help newly minted portfolio CEOs navigate the nuances of interacting with and reporting to the company’s board,” he said. “Second, board members come with a Rolodex of valuable connections to talent, mavens, other businesses, and potential customers. Third, board members and operating partners tend to share a set of key skills.”
The Market for Senior Roles Heating Up at Private Equity Firms
Recruiting the right people to put in senior roles at PE portfolio companies and developing executive leadership teams to drive growth is hotter than ever. The most direct way a search partner can help PE/VC firms looking to build out management teams is obviously to identify, attract, and introduce strong talent. But, the true value of a strong search partner lies a level deeper—in the unique perspective and pattern recognition that comes from speaking with the most successful and influential leaders in a given space, recruiters say.
“Even though the macro environment has slowed PE dealmaking, this is the busiest period our PE search team has seen,” said Matt Harvey, senior partner at London-based search firm InX. “Investors are sharply focusing on the value creation journeys within their portfolio companies to counteract the various issues facing businesses today, and with many hold periods being elongated funds are really turning the screw to increase the value of their portfolio companies ahead of future exits. Against that, management teams are suffering fatigue. All of this plays into the hands of funds with strong operating teams, which is why investors up and down the chain are strengthening their functions – whether that be making their first, or 21st operating hire.”
“Good board members look beyond the executive horizon to chart their company’s long-term strategy while at the same time monitoring and advising the company’s day-to-day operational team,” Mr. Anderson said. “Operating partners need to demonstrate the same kind of bifurcated thinking, facilitating tangible and timely change in their portfolio company while also considering the long-term trajectory of the private equity firm’s investment.”
- Board members, like operating partners, are tasked with assessing their executive team, ensuring that the CEO and management have been fully briefed on the firm’s strategy, that they have the skills and inclination to implement it, and that they do so in an efficient and effective manner.
- Successful board members and operating partners tend to be proficient in communications-based leadership styles. Unlike turnaround executives, whose decisions are implemented down a defined chain of command, board members and operating partners must take softer approaches. Their job is not to yell in the executive team’s ear but to whisper—effecting positive results through persuasion, change socialization, and consensus.
Mr. Hood also echoes the importance of these characteristics, saying, “I think of an operating partner as the mid-point between the CEO and a board member, so board experience is key.”
Final Thoughts
The ZRG Partners report concludes by noting that if you’re looking for a new operating partner, be patient. Finding the right one takes time. And even the best candidates sometimes require a brief learning period.
“In looking for an operating partner with CEO, board, or consulting experience, it’s important to reference extensively,” Mr. Anderson said. “You want to get a good idea of how effective the candidate was in these roles. For former consultants and board members, you want to see that CEOs have received valuable contributions from the candidate. For former portfolio company CEOs, you want to see how successfully they applied the strategies suggested by their private equity backers. Candidate assessment should be similarly rigorous, measuring beyond their current core competencies to look at their learning methods and the time that it will take them to fully develop into the role.”
Related: Redefining the Search Sector for PE Leaders
Contributed by Scott A. Scanlon, Editor-in-Chief; Dale M. Zupsansky, Executive Editor; Lily Fauver, Senior Editor – Hunt Scanlon Media
