A recent survey by Heidrick & Struggles reported that the private equity operating partner role was “the fastest-growing position within the industry.”  Alvarez & Marsal recently stated that most private equity companies surveyed indicated their intention to grow their operating groups, with more than half expecting to grow by at least 50% over the next two years. Unlike internal operating partners, who are employees of the private equity firm and may have a broader scope of responsibilities, outside operating partners are specifically leveraged on a deal-by-deal basis to match their skills and background. As a result, both internal and outside operating partners are highly sought after in the industry.  So, why are private equity firms increasingly turning to operating partners?

Improved value creation and return performance: Private equity firms partner with outside operating partners to improve value creation in their portfolio companies, which leads to higher returns. A survey by PwC found that 92% of private equity firms using outside operating partners cited value creation as the primary reason for doing so. Private equity firms that use operating partners also expect higher returns. According to a report by Coller Capital, private equity firms that use operating partners expect an average IRR of 19.4%, compared to 16.3% for those that do not use operating partners.

Aligned interests: Private equity firms and operating partners typically have aligned interests. Both parties are invested in the success of the portfolio company and have a financial stake in the outcome. This alignment helps ensure that both parties are working toward a common goal.

Increased competition: Private equity is a highly competitive industry. Working with outside operating partners provides a competitive advantage in identifying and executing on investment opportunities. A survey by PitchBook found that 52% of private equity firms used operating partners in 2019, up from 34% in 2010.

Investor peace of mind: Investors expect private equity firms to have a comprehensive strategy for managing risk and delivering returns. Working with outside operating partners provides additional assurance that the private equity firm is taking proactive steps to achieve these goals.

Improved diligence scrutiny: Due diligence is critical to the success of private equity investments. Operating partners help improve diligence scrutiny by providing expert input and validating assumptions. A report by EY found that 75% of private equity firms using operating partners did so to improve diligence processes.

Risk mitigation: Investing in companies is inherently risky. Operating partners help mitigate this risk by providing expert guidance and execution to portfolio companies. A study by McKinsey & Company found that private equity firms using operating partners outperformed their peers in EBITDA growth and total shareholder return.

Limited resources: Private equity firms typically have small teams and limited bandwidth, which may prevent them from fully evaluating potential investments or adequately supporting their portfolio companies. According to a report by EY, 80% of private equity firms cited limited resources as a reason for using operating partners.

Executive talent shortage: Private equity firms often require executive talent for their portfolio companies. Outside operating partners provide access to this talent, which may be in short supply. A survey by EY found that 67% of private equity firms used operating partners to access executive talent.