May 31, 2017

The Modern Portfolio Operations Construct

The Modern Portfolio Operations Construct

It seems to me that a company’s organizational structure is always being pressure tested for how it responds to the realities of a changing market. So many times we see large corporations undergo significant structural overhauls. One day they are organized in distinct business units where the GMs run the show with a good degree of autonomy; and the next day they might transition to a functionally based organization where power rests at the top of the functional disciplines. Sometimes the moves are reactionary to mirror “state of the art.” Sometimes they are simply desperate attempts to salvage a Board’s previously miscast strategic plan. In any event, they always lead to chaos, upheaval and uncertainty for everyone involved.

These days, Private Equity firms are not immune to examining these turbulent shake ups, particularly as it relates to their Portfolio Operations capabilities.

In some cases, firms have had a Portfolio Operations offering for almost 20 years. Firms like Bain Capital, CD&R, Sun Capital and TPG come to mind. Over that expansive timeframe, it makes sense that lessons are learned about the best structure within which to deploy the capability; and that changes are bound to be made. Some of these more evolved firms set the precedent that many PE firms across the middle market followed for their own PortOps structures. If it was good enough for TPG, why shouldn’t we try it out?

As such, we saw many firms strive to build out a complex, all-encompassing coverage model for Portfolio Operations. There were leaders who managed the teams; there were full fledged partners in the carry pool; there were groups of 1099 consultants; there were functional specialists; there were senior advisors; and there were industry savants. There was also… tremendous fixed costs associated with this choice. Would it all pay off in the end? The answer to that questions seems to be rolling in.

Based on the numerous conversations I have with GPs considering the right PortOps structure, I’m seeing a certain trend toward a more conservative footprint of Operating Partners, and a more distinct capability set. The large generalist model run by a “manager” is being blown up in favor of industry specialists.

More often than not, PE firms are organizing themselves around industry teams internally. There’s the Healthcare “desk”, the Tech “desk”, the Industrials “desk”, etc. These investment professionals spend a high degree of time together and have “access” to carve out a range of dollars from the total fund to support their industry efforts. These investors want to incorporate the capabilities of an Operating Partner who has a deep understanding of their particular industry sector so that they can more accurately price the deals for which they are competing.

The industry specialist Ops Partner gets deeply ingrained into the sector team. They help fashion the investment thesis from a macro level, they leverage their rolodex for tactical deal flow, they use their connections to gain an advantage during due diligence, and they call on their historical depth in the space to craft the portfolio company’s strategic plan. By definition, they are optimizing their own capability set in the most perfect setting inside a PE firm. When it’s done right, the returns are tremendous and the “team” becomes a shining example of success inside the PE firm.

Also, when it comes to “share of the pie”, this approach reduces total fixed cost for the PE firm… a fact which isn’t lost on anyone.

I expect that we’ll see a continued adoption of this Industry focused model as the next few years play out. If you’re in the market as an Ops Partner today, or as an exec who’d like to move into such a role, tighten up your story to emphasize your industry expertise, and then market yourself to those particular teams of investors.



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