What is an Operator in Private Equity?

What is an Operator in Private Equity?

You’ll find we use the word ‘operator’ across our website frequently, and if you’re new to the private equity and venture capital space, you’re probably thinking “What is an operator? Is it a person that helps with the operations of companies?” Yes and no.

An operating partner (or operating executive) is a title used by investors which describes a custom-made role reserved for value creation within private companies. Sounds broad, right? That’s because it is.

The role was created by mega private equity firms about 20 years ago when they realized that more money could be made by boosting a company’s performance and improving all core metrics rather than simple financial engineering. After using outside consulting firms to do this and eating into profit margins from the high fees associated with traditional consultants, they looked inwards. The operating partner as a role has shifted into a full-time position with high incentives associated with the growth they are responsible for, financially encouraging them via carried interest and performance bonuses.

Who can be an operating partner?

An operating partner is someone who has driven success in their own respective field, either through a tenured career (usually former C-suite executives) in a single industry or a former entrepreneur with a successful track record in the same industry.

These operators will have a robust source of knowledge on how a specific industry functions, and deep personal connections to competitors, suppliers, providers, and other relevant services within the industry. Operators will utilize these skills and relationships to grow and optimize portfolio companies within the typical 3-5 year time horizon of private equity investments.

What does a role as an operator look like?

An operating partner’s job function is extremely dynamic - private equity investors rely on them to draw upon their years of experience in achieving similar results, utilizing the lessons learned to avoid similar mistakes, calling upon relationships for optimal pricing for service providers, understanding which additional hires are necessary and what characteristics to look for within those hiring decisions, and much more.

Operating Executives typically do not have a structured role, but rather the role is dynamic in owning a key area of the company (i.e. operations, logistics, marketing, financial, etc) and transforming and optimizing this to not only maximize value creation but reconstruct it in a way that is set up for future scalability to the next buyer.

Do they work for the investment company (private equity firm) or for the portfolio company?

As with anything, it depends. Functional Operators can work directly with the portfolio company, or as what we like to call a ‘mercenary operator’, which is an operator that works for the private equity firm itself, and steps in to each of their portfolio companies on an as-needed basis. This is reserved for specialized private equity investors that are investing in 1-2 specific verticals and need similar expertise across many investments.

Whether the operator is working with the portfolio company or with the firm itself, there will always be a high degree of incentivization to ensure all parties involved have alignment with the end-goal (value creation).

How long does the operator stay with the company?

The most important timeframe for the operator is between years 0-2 of an investment, during which the most change is being implemented for an investment. After this timeframe, we will see operators decrease their hours and only be utilized for strategic decision-making, or move on to other portfolio companies of the private equity firm if there is a strong relationship between the two.

There are plenty of cases where an operator is only needed for a six-month or one-year engagement, which is more common within the lower middle market of private equity, where budgets for these smaller companies have less breathing room (although executive talent should be one of the most prioritized functions on the balance sheet, especially early-on).

Ultimately, the timeframe is dependent on what the firm wants, what the portfolio company needs, and what the operator is willing to give.

Where do you find operating partners?

The most traditional ways to find operating partners stems from being invested in an industry long enough, firms will develop relationships with high-level executives that have the capabilities to be an operator and grow these investments. The issue is that many PE firms are relatively new and don’t have these personal connections, or they are a generalist investor that never delved too deep into a specific industry to work with the right individuals.

The next option is utilizing headhunters and job boards, which can work if pockets are deep and your team has a long time horizon to be delivered the right options. For job boards, there needs to be a sufficient amount of time to skim through the hundreds of applicants that the firm would ultimately get, which oftentimes is more hassle than it's worth.

The strongest recommendation is to utilize Flywheel, where there is a deeply vetted list of operators that cannot be found anywhere else, ready to have a conversation and determine whether their skillset matches the role, portfolio company, and job function at hand. Not only does every single operator have to go through qualifications that ensure they are a true functional expert, once a hiring firm works with us, they can bring on as many operators as they want, drastically reducing the wait time from headhunters to start growing the portfolio companies quicker.

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