They are called operating partners, value creators or growth leads. Whatever their name, middle market private equity firms know they need to provide operating help to their investments.
Over the past six months we’ve spoken with over 50 middle market PE investors. Many have invested in operating resources at the fund level. Those that haven’t are trying to figure out how to start.
Most have found them valuable, but very few have found the Goldilocks solution for today’s market – one that can provide ample, ready to go strategy and execution assistance while limiting additional overhead to the fund.
Here are the models we’ve seen, and their advantages and challenges:
Internal operating executive teams:
An operating team employed by the fund and charged with helping company leaders with strategy, process and filling operating gaps. They are often former consultants with strong strategy chops that can wear various hats or former execs at portfolio companies. .
Investors trying this model tell us that these teams are small due to the cost, so demand for their time usually outstrips supply. They also report that ex-consultants are great with strategy but they frequently struggle with operating roles due to their backgrounds. As a result, many opportunities are slow to be addressed, or are never fully realized.
Outside advisors:
Highly experienced and seasoned leaders that serve as industry experts or can mentor CEOs and the leadership teams or serve as board members. Investors bring them in as advisors and coaches. Many investors we speak with will bring in an ex-CEO to keep the company going for a few months until a full time replacement can be found. While valuable, the Advisors are expensive, and they often don’t solve the need for resources that can quickly execute on plans, nor do investors expect them to.
Functional Experts:
Staff function experts, such as in finance, HR and recruiting, that work across multiple companies. Staff activities are viewed as standard across industries and business types. Shared services are valuable because they deliver operational efficiencies and drive best practices.
The funds we know, however, that have attempted to build out shared service marketing or sales groups find that requirements differ across companies, needs may span multiple functions, or prior industry experience is helpful. The need is great, especially now when topline growth is paramount to building value. It’s difficult to find a single person or a small number of people that can do everything across an entire portfolio.
Conclusion
Regardless of the model, middle market investors haven’t found the best way to provide capable resources to tackle the most pressing challenges or take advantage of all the opportunities across their portfolio. Securing strong execution skills in sales, marketing and corporate development are often the most difficult to bring in-house, yet are critical in the current environment. Over the coming weeks, we will be exploring this topic in greater detail.
If you are an investor and are experiencing any of these challenges, give us a call to discuss how you can get more leverage from your current operating executive model.