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Comment: How to pick the best operating partners

Operating partner selection is an undervalued practice in private equity.

Broadly speaking, the competencies required to excel as an operating partner come in two buckets. First, there are the hard skills. Does the operating partner have a track record of creating value in circumstances similar to those of the portfolio company? Hard skills can be measured through project-based metrics such as inventory turns and, ultimately, internal rate of return. The numbers provide the answers you need. Soft skills, in contrast, can be much more challenging to gauge. Can an operating partner with the hard skills needed to personally create value also effectively influence others to do their part, even when this entails asking people to go against their own initial instincts? 

Two relationships are especially vital. The first is that of the operating partner and the deal partner. The deal partner and deal team’s confidence that the operating partner will, in fact, create value is enhanced by the operating partner’s ability to speak the deal team’s language, share their outlook, and exhibit a sound private equity perspective (i.e. deal structuring, focus on cash flow). One scenario deal teams are keen to avoid is an operating partner “going native” and siding with the portfolio CEO. As a result, former conglomerate CFOs with experience overseeing groups of companies with relatively little shared infrastructure are often favored candidates. However, the best case scenario is generally an operating partner who can both personally engage with the portfolio company and maintain a healthy degree of detachment. 

In addition to believing in the hard skills of the operating partner, portfolio company CEOs need to trust that their autonomy and authority will not be compromised. Portfolio company CEOs may fear that an operating partner will usurp their power or serve as “a spy for the fund”. As such, the operating partner’s ability to influence the portfolio company CEO is a soft skill rooted in the ability to earn trust.  As one operating partner said: “You have one big gun with one big bullet: Fire the CEO. But you want to avoid using that bullet at all costs.”  

To prevent that outcome and its many attendant risks, operating partners need competencies in areas such as collaboration, influencing and change leadership. Former senior consultants who went on to business leadership roles tend to exhibit such soft skills. 

Clearly, soft skills can be as vital as hard skills in driving portfolio company value. The most effective operating partners use their empathy to navigate and synthesize the concerns of the deal partner and the portfolio company CEO. They know when to act and – as important – when to listen. Yet many funds select operating partners principally based on demonstrated ability to personally create value via hard skills, while giving little or no weight to collaboration and influence. 

Many operating partner candidates who have the right hard skills – such as a career’s worth of supply chain expertise, or CPG marketing experience in emerging markets – may not bring similarly demonstrable ability to lead organizational change or influence others, simply because they have not had the opportunity to do so. Assessing the potential for soft skills is a powerful bridge for this dilemma. 
 
Potential can be identified by searching for the personal traits that lay beneath the demonstrable leadership behaviors. For example, a properly conceived leadership assessment can identify an innate ability to engage others, which in turn indicates potential to earn trust and effectively influence and collaborate. The presence of such potential, which can be measured, uncovers candidates who may not have yet had cause to develop their soft-skill competencies, yet are quite capable of doing so. 

Assessing the potential for soft skills among operating partners with demonstrated hard skills is a powerful and often overlooked way for private equity funds to create more value in portfolio companies, and thus earn greater returns.  

Christoph Lueneburger leads the private equity practice at executive search and talent strategy firm Egon Zehnder.