Now that I have drawn a line in the sand around the superiority of housing industry specific Operating Partners alongside the deal teams who focus on those sectors, I need to examine the reasons why I arrive at this conclusion.  I’ll start at the macro level, and progress down with more granularity as we dive deeper.

Across the asset class, by a wide margin, firms that engage in sector specialization perform better than those who are a pure generalist model.  The LPs themselves have anointed specialists as the preferred firms if you simply examine to whom the abundance of dollars flow.  Combining this condition with a belief that Portfolio Ops makes a difference leads to an inescapable conclusion that supports this set up.  

Second, it is important to realize that the nature of work has changed dramatically over the last two years, and though we may long for how things were formerly done, we simply won’t be able to un-ring this bell.  Flexibility is the name of the game.  Optionality will be held in high regard.  Personal accountability over one’s schedule and results will be the new modus operandi.  But while all of these provide workers with freedom and liberty to self-govern, it also provides the employer with a necessary realization… despite our hopes and sincere attempts to ensure long term stability, the majority of executives who move into Portfolio Operations roles inside a PE firm will change uniforms for another firm at least one time in their career.  (And for many of them, they’ll work for three or more firms during their time served in PE.)  

Your initial reaction may be that this smells of instability, and disloyalty.  You may not like to face down this reality, but as someone who sits in the middle of your relationship with your Operating Partners, you need to trust me on this.  These talented executives are no less interested in maximizing the fulfillment in their career (measured in multiple ways) than any other A-player.  Why would you ever assume that you could lock them up in perpetuity?  They have a multitude of opportunities before them that your deal professionals simply do not.  For these reasons, the leadership in a PE firm should accept this probability.

There is a silver lining, though, and perhaps it is to view your team construct on a fund-to-fund basis.  While the pace and velocity of fund raising has certainly increased over the last 5 years, I think it’s a reasonable position to assume that your Operating Partner will be with you for a maximum of two fund cycles. Could some team members surprise you with longer standing?  Sure.  But is that really in the best interest of all concerned?  That’s where it gets debatable.  

Business conditions change rapidly, as do your investing preferences.  Think about the state of the industry 10 years ago, and how different things in PE look today.  How many people’s operational tool kit from a decade ago is still finely tuned for 2021?  Interestingly, the same cannot be said for the tool kit of your deal professionals.  For them, there may be some innovation related to the pace of what they do and the systems they utilize to do it, but for the most part investing skills will not grow stale on the vine.  The idea of freshening up the operating tool kit every couple of funds is likely in the best interest of your returns… and probably in the best interest of the Operating Partners themselves who can shop their experiences to the next most relevant landing spot.  

This all leads to the conclusion that the best Portfolio Operations structure is to house industry specific Operating Partners alongside the correlative deal teams.  This allows for the quickest ramp to value creation in the portfolio.  They should have fresh perspectives on the trends inside the industry, the acquisition targets, the talent and the consultants who serve it.  This immediately makes your franchise better.  Consider these men and women to be your Sherpa to the space.  You might make it to the top of Everest on your own, but if you want to survive, why would you ever try?

Perhaps down the road there are certain recurring issues within subjective functional areas that you can predict will persist no matter what industry a portfolio company occupies (ex. IT/Tech transformation, FP&A and human capital).  For those, as your firm grows in complexity, perhaps you add specific COE around them, but it’s not where you should start. 

Having seen certain firms successfully engineer this model, I personally have many thoughts around how to identify, recruit and pay for the Operating Partners that fit well into this dynamic.  We could also explore the pro’s and con’s of various seniority levels, and the spec itself.  Happy to share those in a more private context if interesting.

After 15 years of doing anything, there should be some realizations around the way to do it better.  PE Portfolio Operations is no different. Have a Happy Transformation!