Let’s say you are an investor and one of your portfolio companies is struggling to hit their objectives. Do you proactively recommend one of your operating partners to your CEO? Do you wait for them to ask for help? Now let’s imagine your are the CEO and your investor “suggests” you hire their value creation expert to help you accelerate growth. Are you obligated to hire them? Here are four suggestions to get to a win-win.
For the CEO of a PE-owned middle-market company, having your investor even offer to introduce a consultant or operating resource may raise questions. Questions intensify the more the fund pushes the resources. While assistance is usually welcome, CEOs want to ensure that external support is both helpful and trustworthy, and quite frankly, will make them look good.
In this article, we spotlight four challenges that arise when fund operating executives collaborate with portfolio companies, and recommendations on how to navigate them.
CHALLENGE 1: Navigating the Trust with the Operating Partner/Executive
In the world of private equity, trust is the cornerstone of a successful relationship between operator and investor. PE funds love operating partners because they are resources they trust with their investment. They can take on many strategic and operational challenges that are out of their own core skill set, such as marketing or operations. Yet a plug from an investor or board member can corner CEOs, and test their trust. Suddenly, their leadership prowess is under the microscope – is this external resource genuine support or merely an oversight mechanism?
The solution is that while investors can and should suggest resources, the investor should make clear that the final decision resides with the CEO. Unless the situation is so dire that the investor needs to take drastic action, of course. And even in this case, a collaborative solution is essential to ensures that the CEO is a supporter, not a detractor.
CHALLENGE 2: Overstretched Operating Partner Teams
Our discussions with numerous PE firms have unveiled a ubiquitous concern. Portfolio needs, especially in difficult economic environments such as now, can overwhelm Operating Partners. They often can’t spend enough time with any single company. Despite the demand middle market funds don’t want to take on additional headcount themselves and it doesn’t make financial sense either. They really need a comprehensive team without the carrying cost.
The solution is twofold. First, investors should be proactive in curating a list of seasoned and adept executives who can fill the gap when needed. Second, innovative models, such as Stage18’s, that provides a fully-ready to go team of cross-functional operating executives, present a viable alternative. These can be adeptly managed off the balance sheet, yet they encapsulate the perks associated with an in-house brigade.
CHALLENGE 3: The Value Creation Team’s Skill Set doesn’t fill needs
We’ve also found that PE firms are often inclined to find generalists to support their portfolio companies. These often include former consultants or erstwhile CEOs. Their prowess in rapidly assimilating business tenets is commendable. Some even have a niche mastery in domains like finance or HR. However, their core skillset is often not execution, process or operations, nor do they want to get down in the weeds. This is especially true for line functions such as sales, marketing, and business development, where execution is critical.
The solution is multifaceted. First, it’s imperative to eschew the pitfall of assigning an ill-fitted individual to a critical role. Remember: the goal is to deliver a productive solution, not merely fill a position. Second, focus on finding a results-focused professional who can seamlessly integrate and make an immediate impact. Lastly, while consultants may know the business, you will need someone with both strategy chops and that can deliver on plan. Hence, the focus should be on pinpointing operators who are geared towards fast, tangible outcomes.
CHALLENGE 4: Misalignment between Fund and Leadership Visions
This challenge has deep-seated ramifications. Occasionally, these discrepancies might simmer unnoticed, only to erupt when an operating partner steps in.
To navigate this, three strategies are pivotal. 1) Initial alignment on objectives and tactics among investors, management, and operating partners is non-negotiable. 2)an unwavering commitment to transparent and ongoing communication. 3) Using an individual with a proven track record in harmonizing both investor and company agendas can be the lynchpin in ensuring meaningful results.
CONCLUSION:
PE investors and their portfolio entities engage in an intricate dance of trust that drives overall success. While operating partners add tremendous value, transparency, open dialogue, and mutual respect are paramount. Strong collaboration between investors, operators and operating partners will yield above market revenue growth and pave the way for a higher exit multiple.
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