Private equity firms are always seeking innovative ways to drive growth and maximize returns for their investors. One increasingly vital strategy is the deployment of operating partners. These seasoned professionals have extensive industry experience, as well as a track record of increasing shareholder value. They focus on strategic and operational improvements within portfolio companies, using their extensive networks and expertise to create significant value. These professionals excel in private equity value creation, ensuring that every investment realizes its full potential.
In this article, we will examine what a private equity operating partner in a value creation team is, explore the skills and background these professionals typically possess, discuss their compensation, and delve into the specific roles they play in creating value for private equity firms.
And, for more in-depth insights, check out our YouTube video where we debunk some common private equity myths.
A private equity operating partner is a highly experienced professional hired by private equity firms to enhance the performance and value of their portfolio companies. Unlike investment partners who focus on deal sourcing and financial structuring, operating partners work closely with the management teams of portfolio companies, providing guidance on crucial areas such as operational efficiency, growth strategies, and organizational development.
Similarly, a value creation team is a specialized group of professionals within a private equity firm dedicated to improving the operational efficiency and profitability of its investments. This team typically includes operating partners and other specialists in areas such as finance, marketing, technology, and human resources.
The main collective goal of an operating partner and a value creation team is to increase the value of portfolio companies. By utilizing their industry knowledge and practical experience, they ensure that portfolio companies not only meet but exceed performance expectations, ultimately leading to successful exits and substantial returns for investors.
A private equity operating partner should possess a diverse skill set and a rich professional background to effectively support portfolio companies. Key skills include:
An operating partner’s background typically includes:
Similar to a private equity operating partner, it is vital for value creation team members to have skills in communication, strategy, problem-solving, and financial expertise. In addition to these, they should also be skilled in:
Their background should also include:
The compensation of operating partners and value creation teams in private equity firms can vary widely based on several factors, including the size and success of the PE firm, their experience and background, and the specific responsibilities of the role. Typically, both operating partners and value creation team members receive a combination of salary, bonuses, and carried interest, which is a share of the profits from successful investments.
Now that we’ve established what operating partners and value creation teams are, let’s explore the roles they play in private equity.
When a private equity firm steps in, they don’t just inject capital into a company—they meticulously rework its financial setup to reduce costs and increase flexibility. Think of it like refinancing your home loan to secure a better interest rate but on a massive corporate scale.
One strategy private equity operating partners use is forging relationships with banks that offer more favorable terms and conditions, similar to getting a loan from a bank that truly wants to see you succeed.
Example: Take Blackstone’s acquisition of Refinitiv in 2018 for $20 billion, using $13.5 billion of debt [1] . Blackstone didn’t merely buy a majority stake in the former Thomson Reuters business; they restructured Refinitiv’s debt to obtain better terms and optimize its capital structure.
This savvy move reduced the company’s cost of capital, providing more room to grow and improve operations. The result? Less than a year later, in 2019, Refinitiv was sold to the London Stock Exchange Group for $27 billion [2] . Blackstone more than doubled their investment in under a year!
Working capital management is crucial for optimizing a company’s day-to-day finances to improve cash flow, and it can make a significant difference in overall business health. It typically involves:
Many PE funds usually have a value creation team member, an operating partner, or a dedicated value creation professional working on these areas across the whole portfolio of companies.
Example: Consider KKR’s acquisition of Pets at Home in 2019 [3] . KKR proactively implemented strategies to optimize inventory management, streamline receivables, and improve payables processes. This led to enhanced cash flow, reduced inventory holding costs, and improved overall liquidity. As a result, Pets at Home was in a stronger position to achieve sustainable growth, becoming more resilient and better equipped for future challenges.
When a private equity firm steps in, they often make significant changes to a company’s board of directors to enhance governance and strategic oversight. This typically involves appointing experts with deep industry knowledge, including senior operating partners who bring extensive operational expertise.
Private equity operating partners play a crucial role in governance by leveraging their industry experience to provide valuable insights and guidance. They collaborate with the board to set ambitious yet realistic goals and ensure the management team is equipped to achieve them.
Example: Thoma Bravo’s acquisition of Instructure in 2020 [4] illustrates this approach. Thoma Bravo strategically added experts to Instructure’s board, providing the strategic insights and operational know-how necessary for the company’s success. This alignment of governance and operational expertise helped drive the portfolio company toward its objectives and enhanced overall performance.
Talent management and leadership are pivotal in transforming a good company into a great one. Think of a company as a sports team; to win, you need star players and an exceptional coach. Operating partners and value creation teams specializing in talent excel at identifying and recruiting these star players who can drive the company to new heights.
Example: In December 2015, L Catterton, a leading consumer-focused private equity firm, made a significant investment in Peloton [5] , a company specializing in connected fitness products and services. Recognizing the need for stronger leadership, they facilitated the recruitment of top-tier executives. William Lynch was appointed as President [6] , and Jill Woodworth joined as CFO [7] . They also recruited senior leaders in marketing, supply chain management, and technology.
The results were remarkable. Peloton scaled its operations efficiently, enhanced its product offerings, and expanded its market reach. This new leadership team guided the company through its IPO in September 2019 [8] . Even amid the challenges posed by the pandemic, they maintained growth and high customer engagement throughout.
A successful company creates value not only for itself but also for its customers, and this is where an operating partner’s marketing effectiveness plays a crucial role. In private equity, this often means taking a comprehensive, data-driven approach to ensure every marketing dollar is well spent. It involves:
Example: When the Blackstone Group took over Hilton Worldwide, they made significant investments in digital marketing and revamped the company’s loyalty programs [9] . Their goal was to create an engaging, seamless experience that encouraged guests to return repeatedly. This strategic focus on marketing effectiveness and growth strategies significantly contributed to Hilton’s enhanced customer engagement and overall success.
Setting the right price can make or break a product’s success. If prices are too high, customers may turn to competitors; if too low, sales might increase, but potential profits could be missed. By leveraging data and market insights, private equity firms employ pricing optimization to find the ideal price point where customers perceive value, and the company maximizes profits.
To accomplish this, private equity often work with operating partners who have extensive experience in pricing strategies.
Example: When Advent International partnered with Lululemon, they didn’t rely on intuition for setting prices. Instead, they conducted an in-depth analysis of customer behavior, competitive pricing, and industry trends. This data-driven approach helped Lululemon refine its pricing strategy to align with consumer expectations and market demands.
The result was improved profit margins and robust revenue growth. Customers felt they were getting good value for their money, which strengthened Lululemon’s competitive position in the market.
Business development is a critical focus for private equity funds. Even the smallest funds invest significant effort into helping portfolio companies secure new business. This support can take various forms, such as dedicating a team member from the fund to assist with sales one day a week or assigning an operating partner with a robust industry network. This partner leverages their contacts to shorten sales cycles and facilitate introductions to potential clients and key stakeholders.
Example: If we look at TPG Capital’s investment in Spotify back in 2015 [10] , TPG played a crucial role in negotiating key partnerships with major music labels and artists. This strategy attracted millions of new subscribers, significantly boosting its market share. It solidified Spotify’s position as a leading music streaming service globally, resulting in a successful direct listing on the New York Stock Exchange in 2018.
In today’s digital age, staying ahead of the curve is crucial for a company’s success, and value creation teams understand this well. So, they harness the power of big data and advanced analytics to drive business growth and efficiency.
Private equity funds often acquire businesses with outdated systems as they recognize the potential to create significant value through modernization. Oftentimes, these companies either lacked the resources or expertise to employ data scientists, so to address this, many PE funds employ data science professionals as part of their value creation team. These teams are deployed into portfolio companies for weeks or months to extract actionable insights from existing data, be it from customer insights, new product development and market trends, or operational efficiency and cost-cutting.
Example: For instance, when Silver Lake Partners teamed up with Dell to execute a comprehensive digital transformation strategy, at the forefront of their strategy were cutting-edge technologies to streamline operations and gather deeper customer insights.
To learn more about how private equity creates value after buying your business, check out this YouTube video.
A common value-add strategy in private equity is the ‘buy-and-build’ approach. This involves identifying and executing acquisitions to enhance value. Value creation teams play a crucial role in this process, often working closely with the investment team at the private equity fund.
In essence, a fund acquires a smaller company in the same industry as a business they already own, referred to as the “platform acquisition.” The fund then identifies smaller targets that would strategically complement the platform business. This increases revenue through acquisitions (i.e., inorganic growth) and creates synergies, such as reducing personnel in the acquired companies by leveraging the existing team in the platform business.
This strategy can be highly accretive, as smaller businesses are often acquired at lower multiples, while the combined entity is valued at a higher multiple due to its increased size. Additional benefits of the buy-and-build strategy include:
Example: A prime example of a successful buy-and-build strategy is Vista Equity Partners and their investment in Marketo. Vista acquired the marketing automation software provider and pursued several strategic acquisitions to enhance its product offerings and expand its market reach. This move resulted in an impressive increase in Marketo’s value, culminating in its acquisition by Adobe for a staggering $4.75 billion [11] . This showcases how value added investors can significantly impact a company’s growth and market position.
Exit planning is the final stage, where all the hard work pays off, and the portfolio company is sold at the right time and under the best possible conditions to maximize returns. Meticulous preparation during this phase helps to ensure that the portfolio company avoids becoming VC orphans—companies that struggle to find the right buyer or exit strategy. Here’s a closer look at how it works:
Example: Apollo Global Management exemplifies the art of timing exits, particularly when buying distressed businesses and selling them at a more favorable point in the economic cycle. When they acquired McGraw-Hill Education, they actively worked to optimize its operations, enhance its financial health, and strategically position it for sale. All the same time, they kept a close eye on the market and exited it perfectly to a consortium led by Platinum Equity.
Private equity operating partners and value creation teams play a crucial role in driving the success of portfolio companies. Their combination of strategic insight, operational expertise, and industry connections uniquely position them to unlock value and promote growth. By focusing on long-term improvements and leveraging their extensive experience, value creation teams ensure that portfolio companies are not only prepared for successful exits but also thrive in their respective markets.
As the US and international private equity landscape continues to evolve, the significance of operating partners and value creation teams will only increase, highlighting their impact on achieving superior returns and sustainable business success. Through their dedicated efforts, they continue to revolutionize the way private equity firms realize and enhance value, ultimately shaping the future of the industry.
