For the average buyout fund, the use of operating partners may have no material effect on performance, despite managers’ claims otherwise.
Data from Hamilton Lane presented in mid-October notes a significant increase in general partners touting their operating partner capabilities.
“The place we hear about [operating partners] the most is in general partner marketing materials,” said head of investments Brian Gildea.
This prompted the firm to compare the performance of funds with operating partners and those without. Hamilton Lane compared private placement memorandums from last year with those the firm received in 2008 and found a 207 percent increase in mentions of operating partners.
“What you see is there’s no difference. They look exactly the same,” Gildea said. “That was a little surprising.”
Breaking the data down further reveals that fund size plays a significant role. Small- and mid-sized general partners produced virtually identical performance whether or not they employed operating partners, while large and mega-cap GPs had some improvement.
Just 8 percent of large and mega-cap funds with operating partners were in the bottom quartile, compared with 18 percent for those without, and funds utilising operating partners were more than twice as likely to be in the second quartile. However, there was little difference in the top quartile.
Hamilton Lane’s analysis showed that large and mega-cap funds with operating partners are also more likely to significantly outperform public markets; the impact is less marked at the smaller end.
“In our mind this comes down to scale. These big GPs are able to act almost like conglomerates,” Gildea said. “They have large portfolios of complicated businesses and they’re able to use their operating partners to drive synergies and benefits across the operation in a way that the small and mid-market managers just aren’t able to do.”
Gildea said there could also be other contributing factors. For example, the larger end of the market is often auction-based and operating partners may help managers to win deals. It could also be a question of talent.
“It may just be that the most capable operating partners want to work with these larger companies, and therefore they’re drawn to working with the large and the mega GPs.”
In an interview with Private Equity International, Joncarlo Mark, a former senior portfolio manager at the California Public Employees’ Retirement System who set up investment advisor Upwelling Capital Group in 2011, offers advice to limited partners looking to get to the bottom of the value add offered by operating partners.
“It’s about differentiating what a firm does, what they say they do and if they really do execute. If a firm says they’re operationally-oriented, what does that mean? How do they execute it? And how does management respond? How do they track and measure operational improvements?”