How Did Utilizing Operating Executives Gain So Much Popularity in the Investment World?

The evolution of the operating executive in private equity (PE) and venture capital (VC) has attracted a lot of attention over the past 10 years. As the focus of private equity firms has shifted from financial engineering and clever tax strategies to operational development and innovation, the role of the individual operator has grown significantly in importance, which firms now consider a requirement. This transition has resulted in a much greater emphasis on the role of the operational executive in creating value for portfolio companies, higher than any accounting tricks or hacks that made so much money in the 80s and 90s.

One of the most significant shifts in the private equity industry is the increased emphasis on operational improvement within portfolio companies. This is because partners and directors have come to realize that the old model of financial engineering is not enough to give investors the returns they want as more firms became privy to the strategies used, and real change had to occur in order to improve a company (a net positive overall in our eyes). Instead, private equity firms have begun to focus on operational improvement as a strategy for producing value, such as optimizing supplier relationships, eliminating unnecessary labor or real estate expenses, and so much more. As a result, there is a greater demand for operating leaders who have the abilities and experience to achieve these improvements, which are only found in industry veterans with their own deep network to help facilitate these initiatives.

The function of the operating executive has also been impacted by changes in the broader corporate environment that we’ve seen over the past few years, facilitated by an obvious global phenomenon starting in 2020. The rapid rate of technological development, rising competition in globalized markets (more internet > more reach > more customers > more sellers), and the pressure to achieve a high IRR in a short time frame for returns’ sake have all led to the demand for operating leaders who are extremely adaptive and capable of navigating a rapidly changing business landscape, regardless of their industry specialization.

The operators are frequently leading the management of operational improvement efforts within a portfolio company. This entails a wide range of tasks, including establishing new workflows for fulfillment (service/product), optimizing operations for margin improvement, and developing new revenue streams, either organically or through acquisition. The operator must have a thorough understanding of the industry in which the portfolio firm works, as well as the ability to identify and capitalize on possibilities for growth, which is why we keep highlighting the same point: an operator is not an operator if they are green to an industry (unless their skillset is industry agnostic, since we do get a lot of the “exception not the rule” commenters 🙂)

Leadership skills from the operator is another non-negotiable trait that needs to be identified within the first interview. They must be able to inspire and motivate the portfolio company's management team, as well as work together with the private equity firm to achieve mutual goals. There are a lot of people depending on the success of their role, and balancing both sides of the table is not an easy job. The operating executive must also have excellent communication and negotiation skills, since they will be required to communicate with a wide range of stakeholders, including investors, employees, customers, and suppliers (Never Split the Difference by Chris Voss may be the most recommended book on this).

Lastly, the demand for operational improvement as a way to create value has led to the development of the formal role of an operating executive within private equity and venture capital. The operator is a vital function within an investment fund, responsible for directing operational improvement efforts within a portfolio company with a comprehensive understanding of the industry and extremely capable leadership abilities. They must be able to negotiate a rapidly evolving business landscape and be responsive to the needs of both sides of the table, having the ability to balance a type of pressure that is uncommon in the normal working world.

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