“How many of you are deal guys? Don’t be embarrassed, you can raise your hands.”
That question, thrown in from the floor by Jonny Maxwell, former head of Allianz Private Equity and Standard Life Investments, elicited a collective chuckle from fellow delegates at PEI’s Operating Partners Forum: Europe in London earlier this year – but few hands. Maxwell’s point was that the ‘operators as second class citizens’ complaint – which was alluded to repeatedly at the conference –
was actually wrong, given the increasing focus on firms’ operating capabilities these days.
But the remark highlighted a serious issue: the tension that can occur within firms between dealmakers and ‘operators’, the private equity professionals focused on portfolio enhancement and value creation. How do firms avoid an ‘us and them’ situation? Problems can arise if the two groups don’t value each other’s skillsets, of course, or if they’re compensated differently.
But a key consideration, according to many speakers and delegates at the conference, is when operators get involved in the investment process. If they’re not invited to participate in due diligence and sourcing, for example, operators may be more likely to tell the colleague who did the deal that the company can’t be fixed and shouldn’t have been purchased in the first place. So it’s important to get their buy-in at an early stage. “Operators must sign up in blood,” as one head of a value creation team put it.
And this cuts both ways, said Brian Murphy, a senior director in Advent International’s portfolio support team: “In some firms, when the deal guys throw a company over the wall to the operational guys and things later go wrong, there’s a lot of finger pointing and passing the buck.” Having both teams involved from the beginning creates a much greater sense of shared ownership.
But it goes beyond that, according to Vindi Banga, who became an operating partner at Clayton Dubilier & Rice after 33 years at Unilever: it’s useful to get both groups involved in sourcing and due diligence because their skill sets are complementary, he told delegates.
CD&R, he went on to point out, was founded by one professional with an M&A background and another with an operational background – and thus has always had both types of professionals working in lock-step on investments. But not all firms follow that approach. And figuring out how to integrate operators – or even a new operational philosophy – into firms that have traditionally had a transactional focus is by no means straightforward.
“You can’t build your operating model overnight,” Banga told delegates. “It’s a cultural transformation. Think carefully about who you are as a firm, where you have come from and where you want to go.”
Some firms have internal portfolio enhancement teams. Others use full-time operating partners that were former titans of industry. Others keep high-level senior advisors on call or rely on third-party consultants. A number use a combination of all those methods.
Ultimately, the model is less important than ensuring that the various teams within a firm operate well together. As McKinsey & Company director Conor Kehoe put it: “Getting the ‘one firm’ feeling is important – and getting compensation schemes and internal status right is very much part of that process.”