The operational capabilities of a private equity fund manager have significant influence on an LP’s decision to entrust capital to that firm – despite the fact that most LPs don’t have a firm grasp of what a GP’s operations team is actually doing.
Prior to a panel on the evolving relationship between operating partners and LPs at PEI’s Operating Partners Forum Europe in London on Wednesday, a survey was sent out to GPs and LPs pre-registered for the session.
The survey found that just 30 percent of the 45 respondents thought LPs understood the work of a firm’s operations team ‘reasonably well’. More than half – 55 percent – said they ‘somewhat’ understood, and 15 percent said they either had very limited understanding or none at all. No respondents claimed they ‘thoroughly’ understood the work of the operations team.
Despite this, 52 percent of respondents said LPs were often or very frequently asking questions about the operating team, 44 percent sometimes ask about it, and only 4 percent rarely ask about this.
What’s more, 39 percent said the expertise and approaches of a firm’s operating team were either ‘very influential’ or ‘pretty influential’ when it came to LP fund allocation decisions, while 23 percent said it had very little or no influence.
Panellist Lisa Stone, a partner at UK mid-market firm HgCapital, said that while “clearly we listen” to what LPs are asking for with regards to operating capabilities, it is not the driver of how the firm chooses to set up its operating model.
“We figure out for the type of businesses we buy, for what we want to achieve with those businesses, for the culture that we have, what is the right type of people, what are the right set of processes that we need, and therefore what is our overall operating model that supports our portfolio management.” Stone said.
“Then to be able to articulate that clearly back to the LPs is the important thing.”
Fellow panellist Lukas Bucher, a managing director in the industry value creation team at Partners Group, said around 80 percent of discussions with clients on value creation is educational, explaining how the firm will go about creating value in portfolio companies.
“There’s no one model in the industry in the way that it’s done, therefore they really need to find out why your model is the right one for what you do in order to achieve these consistent returns that clients are looking for.”