LPs drive PE operating transformation

Panelists at PEI’s Operating Partners Forum agree that the shift and expansion of operating partners' roles are driven by investors' desire for greater transparency.

Limited partners are the key players in driving the transformation of the roles of the operating partners in private equity, according to panelists at the PEI Operating Partners Forum in New York on Wednesday.

A general partner at a New York-based firm noted that LPs have been increasingly pursuing direct and co-investments, fuelled by a desire to lower their fee burden. As a result, they are more involved than they have been in the past with a firm's investments and operations.

“That leads to LPs asking questions such as 'what are you going to do with these portfolio companies?'” he said.

A partner at a service provider added that, whereas most of the focus in the past was on deal execution, today there's more emphasis on pre-deal ideation. That means a longer checklist of questions for operating partners as the LPs question how a GP will create value within a portfolio company at a time when financial engineering alone isn't enough to generate stellar returns.

More specifically, questions are asked about the basic structure of governance of portfolio companies, specifics of the due diligence process, and different types of financial metrics that GPs use to measure and realise returns, according to one panellist, an operating partner at a Connecticut-based firm.

“It's no longer just based on the investment thesis,” he said. “It's a new role for operating partners if they haven't already been asked to step up to the plate.”

Another speaker, an operating professional at a different New York-based firm, said the conversations he is having with the firm's LPs are now similar to ones he has with the CEOs of portfolio companies. LPs want to know the specific operating plans, and are starting to pay attention to that in much the same way CEOs have, he said.

He also noted that this is a direct reflection of the transformation he's seen in his role, which now requires thoseon the operating side to help the GPs on the front-end.

According to the first panellist, this increased involvement is also part of the larger issue of transparency and disclosure within the industry. If GPs disclose their value creation plans to their LPs in advance, and follow up with them by letter, there shouldn't be large obstacles along the way. LPs want to see good returns on deals and they want to be aware of how they are achieved.

“There's an infinite need to create value for portfolio needs,” he said. “Get ready to get busy, folks.”