Over the past decade, private equity firms have doubled down on operational improvement as a driver of value creation, a trend that was only accelerated by increasing purchase price multiples in the run-up to the pandemic. In a 2019 survey by Heidrick & Struggles, the recruitment firm said it was experiencing record demand for private equity operating partners and that the role was “the fastest-growing position within the industry as of mid-2019”.
This trend has continued unabated through 2020 as firms have focused on supporting portfolio companies through covid-19-related disruption. “Private equity firms have been investing in their operational expertise for many years now,” says Olof Faxander, head of the operational team at Nordic Capital. “But recent experience has highlighted how important an operationally focused approach and mindset is when navigating tough conditions and repositioning for a new normal.”
If operating partners’ skills were not already highly valued in a firm, the pandemic’s impact on portfolio companies will have underscored their significance. “Operating partners have undoubtedly been busier than usual over the past six months as they have supported portfolio companies through challenges and helped them identify new opportunities,” explains Erol Uzumeri, founding partner at Searchlight Capital Partners. “Companies have really needed operational expertise to protect the business or go on the offensive to capitalise on increased demand in parts of the economy.”
New skills for a new era
As we have moved through the initial shock, it has become apparent the pandemic has ushered in a different era for businesses across all sectors – a development that could affect the kinds of skill and experience operating partners will need.
“We are challenging portfolio companies to think about longer-term shifts, which trends have been accelerated and which created,” says Faxander. “There is a need to think strategically as portfolio companies leverage new opportunities in the market and consider what the new environment will mean for their business models in one, two and three years from now.”
Among the biggest trends is increased demand for digital solutions as people have had to work and conduct daily life in a more virtual sphere. “Over the past six months, we’ve really seen an acceleration of things like the emergence of digital channels to market and, evidently, the shift to remote working,” says Jérôme Losson, partner and head of the portfolio operations team at BC Partners. “That has really changed the way companies deal with staff, customers and suppliers and it can change companies’ infrastructure requirements.”
In some firms, the recruitment of operating partners with technology backgrounds had already started pre-pandemic. “When I joined the firm in 2012, the profile of an operating partner would have combined management expertise in a sector and consulting,” says Losson. “Yet since around 2016, we’ve been recruiting people with a variety of technology backgrounds – people who have, for example, worked at Amazon or in data science businesses.”
For other firms, the experience of the past few months, combined with predictions of an increasingly digital future, will lead to a different emphasis when it comes to hiring operational expertise. “The skill sets required to help companies shift to digital technology may not have taken prominence until recently,” says Uzumeri. “Many firms have tended to focus on areas such as supply chains and even where technology expertise has been brought in, it may not have been strategic technology experience. But now we’re seeing many businesses either disrupting or facing disruption, you’ll see increasing demand for a unique set of skills in house.”
Yet hiring these individuals may not be easy. “It’s quite a challenge to find people who understand both the technology and the business outcomes it can enable,” says Losson. “There is a significant role for operating partners to be intelligent translators, to be the architects of technology-led transformation journeys, communicating them in a way that is digestible by boards, enabling the right decisions to be taken.”
An emphasis on agility
Even where firms are working on more familiar operational territory, they may find the landscape has shifted. For example, the restrictions put in place because of covid-19 have highlighted the fragility of the dispersed and complex supply chains many companies built over the past decade. As Losson notes: “Companies have been forced to examine their resilience across a number of dimensions. Supply chain is clearly one of these – where in the past, there was an unquestioned dogma that just-in-time, cost-effective supply chains were highly desirable, we’ve seen significant dislocations over recent months to the flow of goods and people. We can expect an increased focus on trading off resilience and cost-effectiveness.”
“Past experience may not always lead you to the best answers even if it helps inform a response”
Sir Terry Leahy
Clayton, Dubilier & Rice
The agility required to navigate such trends could mean a change in the way operating partners approach challenges. As the former CEO of UK supermarket group Tesco, Sir Terry Leahy, a senior advisor to Clayton, Dubilier & Rice since 2011, knows more than a little about areas such as supply chains. He points to “good expertise in supply chains” in many private equity firms, but adds that he expects “new and different supply chains to emerge, although it’s not yet clear what will change and how they will look”.
As a result of this uncertainty, he predicts the need for a different style. “Operating partners are likely to be more reflective, open and be prepared to listen,” says Leahy. “In the past, the emphasis has been on people being certain and decisive; today, companies and entire sectors are seeing new problems and challenges, in part because of digital disruption, but also because of the pandemic. Past experience may not always lead you to the best answers even if it helps inform a response. More collaborative work and flexible thinking will be required.”
The search for expertise
With widespread change happening across portfolio companies, it is perhaps unsurprising that private equity firms are hunting for expertise across a range of issues, with, according to Leahy, a greater emphasis on areas such as environmental, social and governance, and talent. It’s a trend picked up by Kenna Baudin, partner and head of private equity in the US at leadership consulting firm Egon Zehnder. “We’ve seen increased interest in operating partners with talent experience,” she says. “We will see that continue as we come through the pandemic because portfolio companies will need support around managing through change and increasing their agility.”
The dimension of talent that may well gain greater attention is diversity and inclusion, in particular as the Black Lives Matter protests have brought the issue of racial inequality to the fore this year. “Diversity and inclusion are becoming critical areas for companies that want to achieve operational excellence,” says Uzumeri. “Operating partners will become more focused on driving through diversity and inclusion initiatives through the portfolio – deal teams would be far less focused on this.”
The events of the past few months, combined with growing recognition in private equity that groupthink is the enemy of innovation, could also impact the diversity of operating teams themselves. Uzumeri adds: “Operating teams will need to become more diverse to ensure they have a variety of perspectives on tackling challenges and making improvements. This will be critical for the success of both private equity firms and portfolio companies – it may not have been a priority previously.”
And, echoing Leahy’s point, many believe operating partners will increasingly need to understand how to create value through ESG. As Faxander says: “In a more financially restrained environment, you might expect ESG to move down the priority list, but we’ve seen the reverse happen. The pandemic has really moved things forward, showing how a robust approach to sustainability integration can help companies navigate through turbulent periods and lay strong foundations for the future. Operating partners really need to understand the ESG levers and issues in portfolio companies, with experience in this field contributing great value to a company’s long-term future.”
Tomorrow’s operating partner is unlikely to look like those of the past. While there will remain a place for those with consulting skills, we could see the emergence of a new breed of tech-savvy, ESG-focused executives with strong collaboration capabilities as firms build operating teams with more specialist and diverse expertise.
As Leahy says: “I see operating partners being younger with more digital experience – perhaps in the nexus between data, technology and marketing – an open mind and a willingness to learn alongside everyone else. To be successful, operating partners won’t necessarily be the ones that come up with the answers, they will be the ones that lead a group of people to the answers.”
Getting the right people on board
As operating partners become integral to private equity firms’ success, attracting and retaining the right people becomes increasingly important. Yet operational hires have not always gone to plan, with “people flitting in and out of operating roles” in some instances, according to recruitment consultant Egon Zehnder’s head of US private equity, Kenna Baudin.
“One of the issues is that the term operating partner means different things in different private equity houses,” she says. “When identifying the skills a firm needs, it’s important to draw up a well-defined specification of what it needs the person for. Will it be a full or part-time role? Will they work on deals or post-acquisition, for example? One size really doesn’t fit all when it comes to operating roles – some are clearly figureheads; others are worker bees.”
She also points to situations in the past where operating partners “have tended not to have a seat at the table and be considered a bit like second-class citizens”, although she adds that this is changing as operating skills become more critical to returns.
Diversity across teams is a major focus for firms today, and to achieve this, Baudin advises taking a different approach to recruitment. “You really do have to be deliberate in your search if you are to build genuinely diverse candidate shortlists,” she says. “You have to look in different places otherwise you’ll just come up with the same people. Firms also need to focus on the skill sets they’re trying to address rather than on the chair an individual sits in today. It’s not about what has happened, but about their potential. This is probably more important now than ever because so much has changed – you need agility.”