February 12, 2014
Interviewed by: David Snow
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Three Operating Partners Compare Notes

Senior operating executives from private equity firms Partners Group, The Riverside Company and Argosy Private Equity detail the operating value-add platforms at their respective firms. Topics include:

  • How the role of operating partners has evolved
  • The role of operating partners in sourcing and winning deals
  • How firms of different sizes might approach the operating function

Senior operating executives from private equity firms Partners Group, The Riverside Company and Argosy Private Equity detail the operating value-add platforms at their respective firms. Topics include:

  • How the role of operating partners has evolved
  • The role of operating partners in sourcing and winning deals
  • How firms of different sizes might approach the operating function

Three Operating Partners Compare Notes

Special Report: All About PE Operating Partners

David Snow, Privcap:

Today, we are joined by Fredrik Henzler of Partners Group, Don Charlton of Argosy Private Equity, and Ron Samson of The Riverside Company. Gentlemen, welcome to Privcap and thank you for being here.

Fredrik Henzler, Don Charlton, and Ron Samson:    

Thank you.

Snow: All of you are operating partners in private equity, a huge trend in the asset class, and your presence is being felt and observed more as the asset class evolves. I am fascinated to have all of you here. We will learn about what operating partners do and what they have done historically. Have those responsibilities evolved? Fredrik from Partners Group: you are based in Zug. Of course, Partners Group is a global firm, but you will have more European observations as well, which is great to bring to a U.S. middle-market mix. Can you talk about what you do for Partners Group, what your team does and how those roles have evolved?

Fredrik Henzler, Partners Group:

We are a team of 21 operating professionals, organized in six industry verticals. We spend about one third of our time in the investment process. Alongside the investment team looking for companies, then doing due diligence on the companies, developing an investment thesis, aligning the investment thesis together with the management and then, winning management over to sell their company and to partner with Partners Group. Two-thirds of our time, we work on implementing with the management team what we developed as an investment thesis, given the holding period.

Snow: Don, does that sound similar to your role at Argosy?

Don Charlton, Argosy Private Equity:

Yes. It depends on the size of the private-equity firm. We are a lower middle-market firm, so we typically buy business from founders and sellers who started the business. It is very different from large private-equity firms. Our firm is different; our operating partners are allowed to source deals and work deals. In most traditional private-equity firms, there is segmentation—there is a deal partner, an operating partner, and they play at different segments along the deal process. Typically, the deal partner will do the deal. The operating partner will be involved up front, but there is typically a handoff. Even though the deal partner’s still running the deal, much of the value creation is driven by the operating partner. Then, when there is an exit, the deal partner usually will step back in and handle the exit from that standpoint.

Snow: Ron, you are the Global Executive Operating Partner for the Riverside Company. How is the operating function structured within your firm?

Ron Samson, The Riverside Company:

Very similar to what Fredrik mentioned, we are about 30 professionals in total, we have operating partners and finance executives, and we get involved from beginning to end. So, not in deal origination, as Don mentioned (we do not get involved in origination that much), but in terms of evaluating and doing due diligence on the investment throughout the period and through the exit process. We are quite involved, we cover the gamut.

Snow: My sense is that, as operating people get more involved in the private-equity process, they touch more of the entire lifecycle of a deal, from sourcing all the way to an exit. Fredrik, is your team helping to shape the macro view of the firm, even before certain companies are looked for?

Henzler: Yes. As a global company, it is important that we know which region and industry we like and where we want to over-weight the search and then, the investment. In parallel to finding the right themes, topics and regions, globally, we also want to find out which segments and sub-segments of the industry we will want to work at. The five heads of our industry vertical teams drive that process. So, alongside our regional deal teams, the global vertical heads with an industry view find out which segments and sub-segments we want to become active in, so we are involved in the beginning of the process and then assist and walk alongside the investment teams in implementing it.

Snow: Are those partners also scouting for deals or is it more the deal partners scout for deals, then you help them vet the opportunities?

Henzler: The deal partners have the key responsibility on sourcing the deals, but with the network I have, for example, my colleagues have within their industry and their segment, there are deal opportunities generated through the operating partner.

Snow: Ron or Don, can you comment either about your own firms or, generally, how has the role of the operating partner evolved? Don, you mentioned there is a handoff—is that the case, that more operating partners are out there sourcing and are there before?

Charlton: The operating partner sourcing is not typical, but it makes sense. Most operating partners sitting at the table have operating experience; we run companies, we have started companies. That is a big asset when you are up front trying to get a deal, or sitting across the table from an owner who started something from his garage and you can identify with some things he or she went through. It helps to build the trust of that team. When we come in after we bought the company and we are trying to establish value-creation opportunities, having that trust up front with the owner and then balancing how much of the value-creation activities will be done by inside resources or outside resources from the firm, that is also a big decision. You have to make sure you have that trust and buy-in of the team so you can move forward.

Snow: Ron, have the operating function or responsibilities of the operating partners at Riverside evolved as you fine-tuned your approach to the value-creation process?

Samson: Yes. Clearly, going back 20 years, most operating partners at firms came in when you got a company that was in bad shape and needed help. Operating partners come in to try to help the company, and over this timeframe to the present, it would evolve significantly to where operating partners are now involved, as we mentioned, from the beginning of the investment all the way through the exit. In terms of what Don was speaking about, our operating partners do not originate either—we have an entirely separate deal-origination team. It is not the deal partners that originate in Riverside; it is a completely separate organization. But, we go along on first visits, as Don mentioned. It adds some credibility, in terms of the resources you can bring to these sellers. So, we found that very helpful. But yes, it has evolved greatly and will continue to evolve.

Snow: Fredrik, can you talk more about what both Ron and Don said about credibility with sellers? Are you and your team brought in to meet with potential sellers? What questions are they asking and why do they take greater comfort that folks like you are on the team, post-acquisition?

Henzler: One theme we like to invest in is finding a regional champion and then helping them expand globally. They often know the niche markets they are active in very well. However, they need assistance in taking the step outside their core market into the new region, into new geography. And having somebody alongside them, talk about how we can assist them, what the resources are, what the challenges will be when we take a purely Asian-based company and build a production footprint in Europe and then in the Americas. We prepare them for that, not just talking about the end state and what we will achieve and this is the deal we will have, but in the early phase, beginning to talk through what we will face for challenges, what will be the success stories we can create together—it makes it more tangible, what you are talking about, they can feel it and if they get a good feeling for what is going to transpire across the holding period, it becomes more realistic that you will achieve the end state. Thus, it can be critical in getting the buy-in from founders and managers.

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