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Study: US GPs more favourable to operating partners

Three quarters of US firms use the operating partner model, a Maine Pointe study finds.

US private equity managers are more receptive to using an operations-based approach to generating value in portfolio companies than their European counterparts, according to new research from Maine Pointe.

The “Status and trends in the use of the operating partner concept in the Americas and Europe” report by the Boston-based consultancy polled 50 GPs spread between the Americas and Europe on the use of operating partners post-acquisition. Three quarters of US firms surveyed said they used the operating partner model, compared to 53 percent of European respondents, while 13 percent of European firms noted they are considering the hire of an operating partner.

More than 70 percent of respondents confirmed increasing LP interest in GPs strengthening their operating partner capabilities. As the study noted: “LPs have recognized the value of the operating partner concept, which will propel a greater number of private equity firms to have the resources on hand to deploy operating partners supported by specialist expertise.”

Sixty percent of surveyed firms rely on an operating partner model although the type differs among private equity sponsors – more than 56 percent of respondents indicated a preference for hiring a business executive with proven business leadership experience, as compared with 13 percent that focus on hiring a professional whose sole responsibility is making operational improvements.

A vast majority, 90 percent, of participants rely on outside operational expertise to drive business improvements in their portfolio companies. Responsibilities among operating partners, however, varied widely, according to survey results.

Some GPs relied on operating partners to be responsible for overseeing improvements in one or two portfolio companies, whereas others prioritized a “hands on working relationship” with a portfolio company CEO followed by an almost equal number of respondents who employed operating partners to enhance a company's valuation during due diligence and those that used an operator to manage multiple portfolio companies.

For those GPs that have used an operating partner model, 72 percent believe that the use of the model had accelerated improvements in their portfolio companies, while 28 percent disputed the model had resulted in improvements.

More than half of respondents indicated that utilizing operating talent had a positive impact on exit valuation. About the same number of participants thought a significant increase operational improvements would help achieve their return performance objectives. None of the study's participants indicated that having an operating partner shortened the length of the firm's ownership period.

When it came to returns, more than 30 percent of research participants noted they had achieved an improved return from their operational improvements whereas 18 percent were not able to ascertain what contributions the operational improvements provided.

Maine Pointe conducted its research from May through April 2015, polling senior decision makers from GPs at all size firms in 6 countries that included the US, Brazil, Finland, Germany, Great Britain and Sweden.

The results of the Maine Point study reflected the importance of operational improvements as outlined in research issued by the Technische Universitat Munchen and Capital Dynamics in 2014.

In that study reported by Private Equity International, which analyzed a range of financial metrics from 701 exited deals between 1990 to 2013, it was found that leverage only represented a third of the value created by private equity from the transactions. In other words, the big factor in creating value in these deals was operational improvement, accounting for 51 percent of the value created.