I ran my first Operating Partner search in 2006 for TPG. We wanted an executive who would come in and contribute across the firm’s Technology related deals. Back then, I really didn’t know what an Operating Partner role was all about, but the folks at TPG sure did. I’m grateful to have been in that situation so long ago, as it has shaped the following 15 years for me.  

Over that course of time, I have sat in hundreds of meetings and interviews where I’ve had a viewpoint into the various Portfolio Ops structures that firms had deployed.  Like any corporate function in its infancy, this role needed to undergo repeated test, measurement and evaluation in order to settle into what could be adopted as its highest and best use.  Many firms spent lots of money, time and political capital trying to discern the right construct.  Some careers were made through this process, others were ruined; but over the course of time, it became settled law that an in-house value creation capability was an essential part of competing inside the cut-throat private equity landscape. Operating Partners were here to stay.

I still find myself being asked similar questions today that were posed during the Obama administration: What is the best way to construct a PortOps team?  If a group of investors could start with a blank slate, how should they act in order to capture the most value long term?  While the answer to this question has been debated by many highly qualified people, I believe that the market has settled in, and that an optimized structure has emerged.  

Drum roll please….

But before we lay out the state of the art, I think we need to clearly enunciate three fundamental assumptions that must be true inside a PE firm in order for it to reach this evolved level of being:

1. You are operating in a scaled environment where you have a dozen or more portfolio companies to oversee.
   • If this isn’t true, you don’t need it.
2. The firm’s investors fundamentally agree that having the value creation capability in house is implicitly connected to better returns.
   • If this isn’t true, you shouldn’t try it.
3. There is a willingness to integrate the Operating team members into the firm in both word and deed (yes, this means compensation and carry).
   • If this isn’t true, you’ll regret doing it.

All that being said, for various reasons that we’ll explore in Part 2, the best structure is to segment your deal teams along industry specialization lines, hire an Operating executive whose experience matches that industry sector focus, and integrate that person directly with the deal professionals.  This will provide the most efficient and predictable model going forward; and will give your teams that much needed edge in performance and results.

Please read on for Part 2: Why is this true?