Smooth Operators

Three private equity operating partners open up about their role in the world of PE, how compensation is structured, and their relationship with deal partners. With Fredrik Henzler of Partners Group, Don Charlton of Argosy Private Equity and Ron Sansom of the Riverside Company.

Privcap

Fredrik, how is the operating team at Partners Group structured?

Fredrik Henzler, Partners Group

We are a team of 21 operating professionals, organized in six industry verticals and we spend about a third of our time in the investment process, alongside the investment team looking for companies, doing due diligence on the companies, developing an investment thesis, aligning the investment thesis together with the management and then, winning management over to sell their company. Two-thirds of our time is spent implementing what we developed as an investment thesis alongside the management team, given the holding period.

Privcap

Don, does that sound similar to Argosy?

Don Charlton, Argosy Private Equity

I think it depends on the size of the private equity firm. We are a lower middle market firm so we are typically buying from founders and sellers who started the business. Our operating partners are allowed to source and work deals. In most traditional private equity firms there’s segmentation: there’s a deal partner, there’s an operating partner, and they play at different segments along the deal process.

Privcap

Ron, how is the operating function structured at Riverside Group?

Ron Sansom, Riverside Company

We’re involved from the beginning of the investment through the exit process. We help determine what investments to make, we’re involved in the whole period —the diligence period and then in the exit period— then we back off a little bit, and the deal partner takes over. On the other hand, we do work to get the SIM right and we work with the management team to get them prepared for the presentation.

Privcap

How has the role of operating partner evolved? Are you actively out sourcing deals?

Charlton

I would say the operating partner sourcing is not typical. But it makes a lot of sense. Most of the operating partners sitting here at the table have operating experience; we run companies, we’ve started companies. That’s a big asset when you’re up front trying to get a deal, or sitting across the table from an owner who started something from their garage and you can identify with some of the things that he or she went through.

Sansom

If you went back 20 years, most operating partners came in when a company’s in bad shape and needs help. In that time frame to the present, it’s evolved to where operating partners are now involved from the beginning of the investment all the way through the exit. Our operating partners don’t originate either— but we have an entirely separate deal origination organization. We do go along on first visits, which adds credibility.

Charlton

One of the way’s it’s evolved is from the LP perspective. I attended an operating partner conference today with an LP panel, and they spoke about the need for firms and GPs to talk about their operating resources. It didn’t used to be that way, but I think LPs looking to invest in funds are asking about methodology.

Privcap

Fredrik, is your team helping to shape the macro view of the firm, even before certain companies are looked for?

Henzler

As a global company it’s important we know which region we like, which industry we like and where we want to be overweight. We also want to find out which segments and sub-segments of the industry we’ll want to work with.

Privcap

When your team is brought in to meet with potential sellers, what questions do they ask? Do they take comfort from the fact that you are on the team, post-acquisition?

Henzler

We like finding a regional champion and then helping them expand globally. They often know their niche markets well, but they feel they need assistance stepping into a new region.

Having somebody beginning to talk through what challenges we will face, the success stories we can create together makes it more tangible. This can be critical in getting the buy in from founders and managers.

Privcap

It’s important for operating partners to feel they’re part of the team, but then there’s an actual alignment of interest with the rest of the firm. How are operating partners economically brought into the deal?

Charlton

There are some firms that treat the function separate, but I would think the majority [of operating partners] are going to be included in the equity carry of the fund. That’s the way it is at our department.

Henzler

The first operating partners that were there often weren’t part of the company; they were external freelancers or kept as consultants outside of the GP. Then they started getting hired and put on to the cash and bonus, and later they got carry in their deals.

Privcap

Most operating partners come from corporate backgrounds, often banking or financial fields, and they’re plugging into private equity firms. How does that work?

Charlton

As it relates to deal partners, whether they’re accepting of operating partners, I’d say they’re receptive. I respect their involvement in the banking field, although I didn’t come from banking. I was in startups for 12 years before I joined this firm. They respect that we’ve run companies, these operating partners, and they leverage that experience.

Sansom

The deal team and operating partners really have to work together. If you don’t, then you have a serious issue within your firm. We’ve never had much of an issue within Riverside. Typically, they’re joined at the hip in order to understand and implement the strategy.

Henzler

It’s important for the long-term success of an operating partner that you’re seen as peers, and integrated into the private equity team.

Sansom

There’s always going to be some tension now and then between a deal partner and an operating partner. The key is to work through those issues like any professional deal team would, whether it be in corporate America or private equity.

Henzler

The tensions can be valuable because they flush out the problem you didn’t think about. They can make you focus on an issue and find a solution that wasn’t there.