Learn about the role of an operating partner and how Cherry Operating Partner helps PE firms increase the value of their portfolio companies efficiently and flexibly.
What is an operating partner?
Operating partners play a key role in private equity (PE) owned companies, especially when PE firms want to improve the performance and growth of their target companies. Operating partners are experienced business professionals with strong backgrounds in management, operational development, or specific industries. They often work full-time but under interim service agreements in target companies, working in operational roles or project positions.
Why are operating partners used?
According to PwC’s article (5/2024), the role of operating partners (OP) has become central to value creation in private equity-backed companies in recent years. The use of operating partners who work closely with the management of target companies is already part of the investment plan, and various tasks cover the entire investment cycle from due diligence to exit. Traditionally, the role has been advisory or influential through board work, but nowadays operating partners work alongside management in operational roles within the target companies.
According to PwC, since 2010, 47% of company value creation has come from operational development, compared to 18% in the 1980s. At the same time, the contribution of financing and related arrangements to value creation has dropped from 51% to 21%.
Large private equity firms may have their own operations teams that deploy to portfolio companies as needed, but medium-sized and small private equity investors should rely on partners who have a broad and always up-to-date pool of experienced professionals from different functions and industries. Through partners, the right expertise can be quickly and flexibly made available to portfolio companies to implement development initiatives, change projects, and handle operational tasks.
Operating partner as a value creation partner for private equity investors
An operating partner offers private equity investors a close interim partnership that is an excellent resourcing model for PE companies. This temporary solution brings flexibility and speed to company development. PE companies often have demanding goals for developing companies and increasing value, and interim professionals can fulfill these needs quickly. Whether it’s accelerating growth, improving operations, or renewing management, interim executives bring valuable experience and specialized expertise without long-term commitment. This flexibility and expertise support owners’ goals to improve company performance and increase value on a fast timeline.
The main benefits of using an operating partner are: 1. Quick service start:
With an operating partner, a company can gain specialized expertise in just a few days. The speed of recruitment is extremely beneficial for private equity firms as it enables rapid growth of the portfolio company and agile implementation of changes. When key roles are filled quickly, the company can accelerate its strategic goals, improve operational efficiency, and increase company value. Quick recruitment also avoids potential bottlenecks and resource gaps, helping to maximize value creation in the short term. 2. Quick and simple service termination:
If situations in the company change, the service can be terminated unilaterally and quickly, without costs. 3. From service to employment
If the company and the individual mutually agree, the service agreement can be converted to employment at any time during the assignment. This allows for a quick start while also enabling both parties to get to know each other and giving time to agree on employment terms. It’s very fast but poses a small risk to both parties. 4. Flexible compensation
An operating partner is a purchased service, with costs covered by the portfolio company. Payment is made only according to working days completed, and the cost flexes according to current needs. Often, a part-time solution works well for growth companies, and in development projects, allocation can vary according to the current phase of the project. Compensation does not need to include typical key personnel components such as bonuses or share-based incentives. 5. Operating partner is not a fixed cost
Using an operating partner is a joint decision of the owners and the company, but the service costs accumulate to the company like other purchased services. Often, the same expert can be utilized in several companies, thus sharing costs across multiple companies and transferring expertise and best practices between companies. Typical shared resource projects include developing financial reporting, HR processes, and sales development initiatives. An operating partner is a one-time investment in development projects, not a fixed cost.
What does an operating partner do?
Some key tasks that operating partners handle in portfolio companies:
- Operational development of the target company: Operating partners help PE-owned companies with financial management, HR, reporting, efficiency improvement, cost cutting, supply chain optimization, and process optimization.
- Strategy development and implementation: They participate in defining the target company’s strategy and, above all, help implement important projects such as expansion into new markets, product range expansion, or acquisitions.
- Management support: Operating partners can support or replace members of the company’s management team. They can, for example, help recruit new key personnel or serve as interim CEOs or management team members.
- Financial optimization: They help the PE company improve the profitability and value of the target company, which maximizes the company’s future sale value.
- Due diligence: Operating partners can be involved in the due diligence process evaluating companies that the PE firm is considering purchasing. They use their industry expertise to identify the company’s commercial potential and risks.
Frequently asked questions about the operating partner model
What is an operating partner service?
Operating partner is a partnership where experienced business leaders, experts, and teams are temporarily placed in private equity portfolio companies through interim service agreements to help companies achieve their strategic and operational goals.
What kinds of companies does an operating partner serve?
Private equity investors and their portfolio companies operating in various industries at all stages of growth and development. The common goal is to help companies take their business to the next level.
How long does an assignment typically last?
The duration of assignments varies from a few months to several years according to the needs and goals of the PE house and its various portfolio companies. Assignments are flexible and adapt during the collaboration to meet the current development stage of the business.
How does an operating partner differ from traditional consultants?
Unlike traditional management consultants, an operating partner is involved in daily operational work and takes responsibility for results.
