As part of its goal to bring value added content and networking to more professionals in the private equity community, ACG Boston has launched an Operating Partner Roundtable series. The inaugural session was attended by a diverse group of Operating Partners and other professionals who support portfolio company performance. The virtual roundtable event offered PE operating partners a chance to connect with peers and to facilitate an open discussion around business concerns and how Operating Partners plan to approach 2021. For those who missed the event, here is a summary of the discussion.

What’s on Operating Partners’ minds?

An around the table survey of the Operating Partners highlighted a number of topics the group wanted to discuss and seek advice from their counterparts. These included:

• Approaches to using internal and outsourced resources and knowing when the outsourced model work best.
• Establishing standard operating procedures among the Operating Partners and deal teams to know what each other are doing with respect to driving value from portfolio companies and to eliminate confusion and overlap.
• How to add process and drive growth in a remote world where new people are joining, and many have never come into the office or met each other in person.
• How to bring new leaders into the organization to round out or upgrade the management team, while maintaining or strengthening the culture.
• Effective ways to encourage and support collaboration and sharing of ideas and resources among the portfolio companies.
• Understanding and leveraging the different approaches that operating partners use to create value.
• How to leverage limited Operating Partner resources across the portfolio by prioritizing and collaborating internally and with others.

While these were all topics worthy of discussion, and ones that are sure to be addressed at future roundtable sessions, the group decided to start the dialogue by sharing their thoughts on coordinating with the deal teams and portfolio company management as the group agreed it’s an issue that comes up frequently. Below are some of the key takeaways. 

The importance of starting early and building credibility

• The best way to address it is to start early. Positioning the firm’s approach to collaboration and value creation during the diligence process helps to set expectations upfront and prepare the management team for what’s to come.
• Several people agreed that a key to success was in sharing the wealth of resources the firm and the Operating Partners can bring to the table to help the business get to the next level.
• Several also mentioned the value and credibility that the Operating Partners possessed themselves by having been in similar roles during their careers.
• A willingness to “roll up the sleeves” was also highlighted as a benefit to gaining credibility and support from the management teams.
• Presumably, management teams are receptive to this collaborative approach and to looking at new processes and tools. If not, it's feedback to the deal team that this management team isn't interested in fitting how the PE firm approaches value creation.

The importance of the CFO

• An important part of the initial discussion is often building financial controls of the business and that often involves upgrading the CFO position. Many owner/CEOs start to understand the need when the PE team begins to lay out the requirements of the job going forward, particularly if covenants are involved. They quickly realize that their current CFO or Controller is not equipped to handle the new responsibilities.
• Several people agreed that the CFOs of middle market companies are often more of a concierge to the owner, vs. a true financial steward of the business.
• This led to a discussion about how the CFO is often the place to establish accountability right off the bat. This can be an important start to shifting the culture from a family or founder owned environment to a private equity approach.
• When upgrading the CFO role, several other roundtable participants noted that they tend to lean towards people that have worked with private equity in the past as they understand the role and environment and will be able to move faster from the start.
• The preference is to lean towards people that they know and have worked with in the past, depending on the industry and location of the portco. Sometimes they end up working with third parties to help find those CFOs when their own networks don’t have what they need.

Beyond the CFO

• Several Operating Partners noted that the CFO transition tends to be more clear cut. Where they've had challenges is in sales and marketing, especially when the company has been very successful.
• Many times, the CEO is the head of sales, or sales and/or marketing is run by their best friend who are seen as “crushing it”. However, these people don’t always know what “good” looks like and what to expect from a more professional commercial approach. They also don’t necessarily know how to scale the business for the exponential growth expected during the hold period.
• One of the roundtable participants talked about the value of an outside perspective for sales and marketing as a way to provide unbiased guidance to the management team, allowing the Operating Partner to maintain their relationship with the CEO.
• It’s also important to uncover the relationship and sales/marketing opportunities early, during due diligence.
• Sometime the sales and marketing upgrade can include bringing in experience above the incumbent for that person to learn and upgrade their skills from, either on a part-time or full-time basis. 

Building management team support

• Another point that was raised was the benefit of seeking management team input when bringing in a new CEO as a way to build the team dynamic early.
• When upgrading the organization, it’s important to blueprint the team upfront. Several of the Operating Partners leverage outside tools during this blueprinting like a lean or continuous improvement process mapping exercise where the team comes up with the things that they want to fix. This helps with buy-in vs. the PE firm coming in and insinuating that what they've done before wasn't good enough.
• By bringing their own team, including the senior leaders in some cases, through a process to map the biggest opportunities, the problems they’d like to solve, and the organization and tools they need to achieve them can help prioritize and build support within the business as it's coming from them rather than from the outside. This helps them understand that everyone is on the same side of the table in wanting the business to succeed. Also, if senior management is hearing it from their own people, it's a lot more powerful and they buy into it a lot quicker.
• One of the Operating Partners shared how they work with the CEOs first, especially when they are retaining an ownership position, to help them see the ROI roadmap and how different decisions can impact not only the value of the enterprise, but also their own personal return. That empowers them to make decisions around culture, hiring decisions, how to set up their finance department, their marketing departments, and other things of that nature.

Balancing the effort with the return

• A challenge with process flow mapping is a lack for familiarity/understanding among management teams and the time needed to bring them along.
• Voice of the Customer/Employees/Partners/Suppliers was also mentioned as a valuable tool, especially early in the process. This provides a fact-based approach to build strategic planning.
• Translating the “voice of” and team input into a strategic plan and monthly scorecards was a popular approach to keeping focus and alignment during the hold period. Several Operating Partners leverage Hoshin Kanri or other similar methodologies to monitor and measure implementation.
• While valuable, this approach can also be a challenge for the amount of work it takes to create and update these plans and metrics, especially with thin teams with limited experience using them. Operating Partners always have to balance the amount of work required to update the plans with the value they provide. Sometimes, it takes trying several different approaches before hitting on the one that works best for a specific organization.

Ongoing dialogue is critical

• Another important factor is the dialogue with the management team as they work through these processes and tools.
• Providing timely feedback and support, even letting the management team know that the updates are reviewed and appreciated, can be an important factor in their continued use. The roundtable participants agreed that it was important to avoid the management team feeling like it’s just an exercise that takes time and adds no value.

The value of learning from each other

• The last thing the group agreed on before we wrapped was the value of getting together to discuss these issues and to learn from each other. Several people were interested in the opportunity to devote more time to the best-practice discussions, even to the extent of sharing screens and showing examples of the tools they are using.
• There was also interest in ongoing collaboration via online discussion or other forums.

Overall, this first roundtable was a success. It reinforced the need for these forums in helping Operating Partners and other private equity professionals engaged in portfolio company value creation expand their knowledge of the tools, techniques, and best practices their colleagues are using.

Be on the lookout for our next Roundtable discussion and be sure to attend and share insights with your colleagues.