Insights from the field…

A few years back, a sponsor brought me in to help replace an Operating Partner they had hired two years earlier. The OP was talented. Strong references, strong pedigree, strong delivery in their last seat. The fit on paper was clean but the fit in practice just didn’t click.

The sponsor’s portfolio had shifted. They took advantage of a relationship that resulted in three of their last four deals being industrial carve-outs from European parents. The OP was more of a platform-growth specialist — very good at running commercial excellence Initiatives through a growth curve. His toolkit was useful, but a bit narrow when asked to stand up a $200 million industrial business that had shared everything with its parent for thirty years. It wasn’t because the guy wasn’t bright. Quite the contrary. He was just thrust into a very complex situation that his experience not had prepared him for.

The sponsor learned a lesson the expensive way. In the twisting world of portfolio construction, the Operating Partner profile is not one job. It’s more like three.

And the carve-out OP — the one most needed in that situation — is the one most often confused with the others.

Three roles, one title

The Operating Partner label has done the industry a disservice. It has flattened three different jobs into one job description, and the result is hiring decisions made on pedigree rather than fit.

The growth OP is the operator who takes a healthy business and makes it bigger. They live in commercial motion — sales force productivity, pricing, channel expansion, M&A as a growth lever. The portfolio companies they thrive in have a working spine. The OP’s job is to add muscle.

The turnaround OP is the operator who walks into something broken and makes it stop bleeding. They live in cost structure, working capital, leadership change-out, sometimes restructuring and 13-week cash flows. The portfolio companies they thrive in are sick. The OP’s job is to triage.

The carve-out OP is the operator who walks into something that has never existed as a standalone business and builds the company from the inside out. Their success depends upon the stand-up — finance, HR, IT, procurement, real estate. The portfolio companies they thrive in are not sick and not healthy. They are unborn. The OP’s job is to deliver the birth and ensure its long-term viability.

These three jobs share a title but as you suspect, they do not share a foundational skill set.

What the carve-out OP actually does

The carve-out OP walks into a business that has, for the entirety of its existence, lived inside a parent. The parent has provided the ERP. The parent has run payroll. The parent has owned the procurement contracts, the IT infrastructure, the treasury function, sometimes the building itself. The parent has provided the CFO, the CHRO, the General Counsel — or, more commonly, has provided a divisional version of these roles that does not survive the transaction.

On the day the deal closes, the carve-out OP gets a Transition Services Agreement. The TSA buys time — usually twelve to eighteen months — during which the parent continues to provide some subset of these services for a fee. The clock starts the moment the ink is dry.

What the OP does next is the work:

• Stand up a finance function — hire a CFO who has done it before, build a controllership, replace the parent’s ERP with something that fits a $200 million company instead of a $20 billion one, get monthly close down to ten days, then to seven, then to five.
• Stand up an HR function — hire a CHRO, build benefits and payroll, often migrate hundreds or thousands of employees onto a new system without losing a paycheck, build a comp philosophy that stops looking like the parent’s and starts looking like a sponsor-owned business.
• Stand up an IT function — separate from the parent’s network, migrate or rebuild core systems, hire a CIO who can do this on a budget and a deadline, manage cybersecurity through a transition that creates new exposure on every front.
• Hire the leadership team — often most of it, often inside of a year. The CEO may have come with the deal; the rest of the C-suite usually has not.
• Manage the parent — because the TSA is a contract, not a friendship, and the parent has every incentive to provide the minimum required service while the OP needs the maximum. Negotiating that relationship, escalating it when necessary, knowing when to push and when to live with imperfection, is its own discipline.

Do all of this while the business is operating. Customers are still ordering, plants are still running, payroll is still due on Friday.

This is not abstract operating work. It is multi-dimensional project management at industrial scale, leadership recruiting at speed, and political negotiation with the seller, simultaneously. It is the closest thing private equity has to building a company from scratch — except the company is already running.

I once watched a very successful Operating Partner at a bulge bracket firm (that you all know and respect) who I’d known for many years transition to the CEO role of a very high growth yet very controversial consumer products business. He hired me to run a Chief Transformation Officer search for the company as it dealt with threats across almost every single aspect of its business.

He said something that stuck with me when we were talking about the difficulty at hand. He said that there are numerous people who have the skill set to run an effective transformation that sits inside of one function in a corporation. It’s a smaller subset who can run a transformation that crosses across two functional areas. It’s near impossible to find anyone who can effectively run a transformation that cuts across three divergent functional areas of a business. In essence, that is the work of the carve-out specialist.

So many things can go wrong and derail the thesis in a severe way. These people are truly precious.

Where these operators come from

The honest answer: not always from where the deal team thinks. Moreover, in general, these carve-out savants never look and feel similar to what you’ve been conditioned to see as exceptional.

The pattern I’ve seen, across more than two decades of placing into these roles, is that the strongest carve-out OPs rarely come from the obvious resume. They come from a smaller set of backgrounds that share a specific characteristic: they have done a separation before, in a real role, with their own name on it. Weirdly, they never actually asked to get this experience, but it settled upon them anyway.

Divisional CFOs who have lived through the divestiture of their division — and stayed through the stand-up. Post-merger integration leaders from large strategics who have run the playbook in reverse. COOs of recently-carved-out businesses who walked through the eighteen months and are now ready to do it for someone else’s portfolio. Occasionally, big-company executives who have led an internal spin-prep — the work that happens before a transaction even has a buyer.

What these backgrounds share is not a title. It is scar tissue. Carve-outs are the kind of work that you cannot fully appreciate from the outside. The operator who has done it once knows what month four feels like, knows what the parent’s relationship manager will say in month nine, knows which TSA line items will become disputes and which ones won’t. The operator who has only watched it happen does not. And the risks of putting that guy in charge are exponentially higher.

The harder truth is that this profile is undersupplied relative to current deal flow. The European industrial carve-out market that has opened up in the last twelve months — Apollo’s Forvia deal, the Advent/Cinven exit of TKE, the broader trend of corporates shedding non-core divisions under balance sheet pressure — is generating demand for an operator profile that the industry has not been actively cultivating.

How to screen for it

The interview questions that surface a real carve-out OP are different from the ones that surface a great operator generally.  

Ask about TSAs by name. Ask which line items they negotiated, which ones they left on the table, which ones became disputes. Ask what their parent-company counterparty was like. The operator who has done this will have visceral, specific answers. The operator who has watched it will have generalities.

Ask about the leadership team they hired. Names, sequences, mistakes. Who came in first, who came in last, who didn’t work out. Ask why.

Ask about the system migration that almost broke them. Every real carve-out has one. Sometimes two. Ask about the budget overruns and the scope creep from the consultants. If they don’t have a story on which they can double-click, they probably didn’t experience a real carve out.

Ask about the moment they realized the standalone P&L the deal team modeled was wrong, and what they did about it. (Every real carve-out has this moment too.)

Ask what they would do differently. The operator who can answer this question with specificity has done the job. The operator who can’t, has not.

Why this matters now

The deal mix is shifting. European corporates are forced sellers in a market where sellers in general are reluctant to move off of their notion of valuation. North American carve-outs out of conglomerates are accelerating. Healthcare, industrials, automotive supply chain — sectors where the underlying assets are real and the parent companies have reasons to shed them — are producing the kind of complex, operationally intensive deals that the industry has not seen at this volume in years.

The sponsors who win in this environment will be the ones who have built carve-out muscle on the operating side. Not the ones with the best models or the smartest strategy consultants. The ones with the best operators have a big edge.

For mid-career executives reading this — if you have ever stood up a business out of a parent, even one that didn’t make headlines at the time, that experience is becoming the most valuable thing on your resume. The next two years of deal flow will reward it. You might actually not get a second look for a more traditional operating partner role, but you can take the carve out expert role all the way to the finish line.

For sponsors — the operating bench question matters more than it has in a decade. Done correctly, the carve-out is the cleanest argument for what private equity contributes to the economy. Done poorly, it is a stranded business with a TSA bill, a missing CIO, and a frustrated GP nine months in.

The door is open. The question, as always, is who’s standing at it.