While there was a period in 2020 that gave us all a “pregnant pause” I think the market has spoken as to whether 2021 can “deliver” the returns we’ve all become accustomed to in PE.

What a wild ride it’s been for the last 18 months.  In so many ways, January 1, 2021 felt like an opportunity for rebirth… a fresh and optimistic start.  Having now settled in and come to the halfway point of the year, it’s a good time to fashion some observations:

• Many firms inside the PE ecosystem saw 2020 in Jekyll/Hyde contrasts.  The first half of the year was batten down the hatches inside the portfolio and pray that we simply don’t lose any investments. The second half was the complete and utter opposite… some firms reported deploying more money in the last 6 months of 2020 than they had ever done in any other full calendar year of their existence.  How could that even be possible?

• The constant stream of news about fund raising is overwhelming.  More often than not, our clients (and many others) are successfully raising the biggest amounts to which they’ve ever aspired. 

• The valuations have held up.  It’s actually a little alarming that portfolio companies are out in a very efficient market of professional investors and can still command multiples that previously seemed outlandish.  For many firms, in order to successfully compete/deploy, the IC has needed to make some decisions that would have been unthinkable just 2 or 3 years ago.  

• Processes don’t look the same as before.  Firms are taking shortcuts during diligence in order to move as quickly as possible.    

Given all of these conditions, what does it mean for the Portfolio Operations teams?  It means that their seat at the table during diligence has become critically important.  Like parents to a newborn, the Deal and Ops teams must share accountability for the outcome.

It’s an “All hands on deck” environment.  I’ve seen clients who’d previously maintained a reasonable and healthy distinction between how Deal and Ops professionals spend their time now need to blend the contributions of these men and women more evenly in an Emergency Room environment to decision making.  When the stakes are increasing, and the speed element of diligence is feeling breakneck, it’s not OK to simply let the intellectual resources of your Ops team sit on the sidelines during diligence.  These people may and many times often do have a keen insight which can avert disaster.  Akin to the recent realization that we can still be productive while working from home, firms must evolve their thinking for what a diligence process should be.  Just because we were able to succeed historically with a certain set of business processes, doesn’t mean that approach is bullet proof today.  Moreover, and more often than not, the Ops professionals have a desire and incentive to get involved in the serious stages of a diligence.  The resource is credible and ambitious… why not use it?

If you’re a current Operating Partner, of course, this can mean more juggling for you.  You don’t want to take away from quality time in the existing portfolio to fall down the rabbit hole of deals that will never materialize.  Working with the deal team on streamlined approach of how and when to use you is the best possible plan.  It won’t be foolproof, but at least it will be consistent, and something around which you can plan your week.

Upon reflection, these conditions and developments all just reinforce what I’d hoped for many years ago when I started working in this function: the Portfolio Operations team in PE is here to stay.  It’s been institutionalized across the asset class and the future leaders in PE won’t be able to remember a time when Operating Partners weren’t part of the essential fabric for success.