Choosing the right fit

There’s no question that the GP community has made huge strides incorporating operational capabilities into their teams. Quite how they choose to incorporate those capabilities varies widely from manager to manager, based on myriad factors related to investment strategy.

ECI Partners’ commercial team, its in-house operations team, gets involved with transactions during the due diligence process, building a relationship with management up front. The team is remunerated through the carry structure of the whole fund.

Each member of the team of four takes responsibility for up to five businesses at a time from the pre-deal phase until the exit, taking on projects within the business itself.

“We see an advantage in being able to facilitate getting more things to happen, faster,” says Lewis Bantin, who heads the commercial team. “We see an advantage in being able to understand what’s really happening within the business as well, to understand how to help.”

ECI’s approach, Bantin says, has “proved to be a competitive differentiator” for the firm when negotiating deals.

At Apax Partners, the in-house operational excellence group has also helped the firm win deals.

“Frequently, we can differentiate ourselves in a process and help identify or create investment angles,” says partner Seth Brody, the team’s head.

Apax’s team of 13 are also remunerated through the carry structure of the fund. However, instead of running a generalist model, the team is functionally oriented, focusing on seven “vertical practice areas” – digital acceleration, analytics and big data, portfolio efficiency, information technology,100-day execution, change and transformation, and ESG.

Instead of having a specific operating partner assigned to a portfolio company, one member of the team will lead the work on a particular company, with others stepping in on a project-specific basis.

“Our view is that we should engage wherever we can have the biggest impact on driving tangible equity value,” Brody says.

EQT, on the other hand, makes a point of avoiding operating partners.

“We believe that having operating partners is quite a challenging model,” says Christian Sinding, partner and head of equity.

Firstly, Sinding says, it can be difficult to get good co-operation from the company’s management team if the investor is forcing it to work with a certain person. It can also cause conflict within the private equity firm itself.

“There can be a tendency to have an A team and a B team internally, where the deal makers become the A team and the opera-ting partners become the B team,” he says.

Instead, EQT appoints a board chair from among its network of industrial advisers to help guide the management team. These industrial advisers earn a retainer, and will be invited to invest both directly into the portfolio company and the EQT funds.

“We are good at learning about our businesses very quickly, but we’ll never know as much as someone who’s an expert already,” Sinding says.



Although some LPs will admit to having preferred operating models, the majority agree that when it comes down to it, GPs need to choose the model that’s the right fit for them.

“Clearly we want to select those groups who have a model that works for them, their portfolio companies and management,” says Graeme Gunn, a partner at SL Capital. “There is no one correct model and it needs to be adapted and integrated seamlessly into the organisation.”

Francesco di Valmarana, a partner at Pantheon focused on European primary and secondary investments, sees significant
 variation in operational interventions depending on the investment strategy.

“If it’s a turnaround-oriented firm then the operational experience is going to be fixing a balance sheet, it’s going to be
putting a tough senior manager in there to take care of the HR issues in the firm, and it might only be a little bit of sales force management or operational excellence etc., because that’s not what needs to be done to the company at that time,” he says.

Secondary and tertiary buyouts often already have KPIs and performance indicators in place, and are likely to require more specialist interventions, such as working on rationalising supply chains following a buy-and-build strategy.

“There is no cookie-cutter approach to this,” di Valmarana says. “We have to sit down with the GP and understand: what is their kind of deal? And then, what kind of operational approach do they bring to it?”



However, talking the talk is not enough. LPs want to see concrete proof that a GP’s operational capabilities contribute to building a better business – and delivering a higher return.

“You can put anything down on paper,” di Valmarana says. “What you look for is evidence in the existing portfolio that there has been an operational engagement which is coherent with the investment thesis.”

As part of his assessment of a GP’s operational capabilities, John Gripton, a managing director and chairman of the global investment committee at Capital Dynamics, looks at the background and composition of the team to assess its relative strength in each sector.

“We’re actually looking at the performance of the manager not just overall but looking at each individual sector and the way that returns have been achieved,” Gripton says.

Gripton wants to know that the operational value-add is not only effective, but also repeatable.

“We’re looking for consistency,” he says. “Is it a model that’s been working for some time now or is it transitioning? There’s nothing wrong with transitioning, but at the end of the day, it’s the future return that’s so important for us. We have to believe the
ability is there to deliver future returns.”



The private equity industry has been under significant pressure in recent months to provide more transparency around fees. How they choose to incorporate operating capabilities into their investment model – and who pays – has not escaped scrutiny.

“No one model is right, but we certainly are looking for transparency [on] total remuneration,” Gripton says.

Those firms that include operating partners in the carry structure or have in-house operations team often frame these services as “free”. However, that’s never really the case, di Valmarana says.

“There’s always a consultancy fee or an operational fee somewhere, and you’re either going to pay it to BCG, Bain, McKinsey etc. or you’ve staffed up internally and that cost is going to be borne somehow by the company or by the fund,” di Valmarana says.

“At the end of the day the shareholders are always the people paying for it, it’s just a question of at what point in the company’s P&L or balance sheet are they paying for it? All we want to make sure is that that’s declared, appropriate and that we understand how it’s working.”

As Gripton points out, the focus should always remain on the end result; higher returns can justifier higher fees, so long as those fees are transparent.

“Yes, we are very mindful of cost and fees, but at the end of the day it’s: do we believe that the net returns that our clients will receive justify the fee level?” Gripton says. “I would be unlikely to dismiss an investment just because of a fee structure if the fee structure supported the returns that we were looking for.”