With dry powder at all-time highs and the PE deal environment being more competitive than ever, the early involvement of Operating Partners (”OPs”) is changing how PE firms handle value creation. Lancor, with its 20-year history of placing operating partners and C-suite executives, is at the forefront of this shift. By integrating operating partners early in the deal process, PE firms can craft robust value creation plans before acquiring assets, setting the stage for exceptional performance from Day One.
The Importance of Early Value Creation Planning
The role of operating partners in developing value-creation plans early in the deal lifecycle cannot be overstated. Here are the key benefits that PE firms derive from this proactive approach:
1. Proceeding with Confidence
Bringing deep industry expertise and operational insight to the table, Operating Partners enable PE sponsors to make informed decisions about potential acquisitions. Collaborating with these experts to identify value-creation opportunities and assess the costs of realizing them helps investors determine realistic bid limits. This comprehensive understanding of value drivers also enhances the firm’s credibility with lenders, who appreciate a meticulous and validated approach to investing.
Private Equity firms can partner with Lancor at each stage to allow a smoother process and higher returns.
2. Establishing a Strong Foundation
Early involvement of Operating Partners sets a strong foundation for building relationships with the management team, essential for long-term value creation. A detailed value creation plan clarifies potential challenges and organizational complexities, aiding in trust-building with existing or new management teams. This groundwork is crucial for navigating change management and ensures that the portfolio company’s staff are aligned and prepared for successful execution.
3. Asking the Right Questions
During the due diligence process, Operating Partners play a pivotal role by helping PE investors identify and assess key levers for value creation. This targeted approach allows for a more focused and productive due diligence process. Sellers are more likely to share relevant information with investors perceived as serious and methodical, further facilitating the development of a strategic and informed value-creation plan.
4. Moving Ahead to Create Value from Day One
With a value creation plan in place, OPs can immediately begin executing strategies such as renegotiating contracts, implementing organizational changes, and optimizing product portfolios. This early action ensures no time is wasted in driving performance improvements and aligning company strategies with core business objectives.
5. Mapping a Realistic Exit Strategy
Developing a realistic exit strategy is another critical benefit of involving operating partners early. Providing a clear roadmap of the steps needed to realize an asset’s full potential, OPs allow for better navigation of the path to exit, whether in the short or long term. This strategic blueprint guides everything from due diligence to Day One action and eventual exit, ensuring a holistic view of the levers that can create value.
Evolving Role of Operating Partners
Over the past two decades, Lancor has been instrumental in placing operating partners who play a critical role in early value creation planning. Historically, private equity relied heavily on financial engineering and leverage to drive returns. However, as the industry has evolved, the focus has shifted towards operational improvements and strategic growth initiatives. Data shows that revenue growth has been the most persistent source of value creation since 2000, underscoring the importance of operational expertise.
Operating Partners are now more involved in the diligence and underwriting phase than ever before. Their early involvement ensures a seamless transition post-acquisition, as they have already identified key areas for improvement and developed detailed plans to address them. Collaborating closely with investment teams, OPs ensure that the value creation plan is not only strategic but also executable, setting the stage for successful transformation.
Insights from Lancor’s 20 Years of Experience with Operating Partner Searches.
The proactive involvement of operating partners early in the deal process has moved from being helpful to becoming a critical component of private equity value creation. By developing comprehensive value-creation plans before acquiring an asset, PE firms can proceed with confidence, establish strong foundations with management teams, ask the right questions during due diligence, and create value from Day One. Lancor’s 20-year history of placing experienced C-suite executives and OPS underscores the importance of this trend and highlights the value of having the right talent in place to drive successful outcomes. For PE firms looking to maximize their returns, partnering with a firm like Lancor ensures that they have the expertise and strategic vision needed to succeed in today’s competitive landscape.
Harvard Business Review. “Private Equity Needs a New Talent Strategy.” Harvard Business Review. Accessed July 30, 2024. URL: https://hbr.org/2023/11/private-equity-needs-a-new-talent-strategy.
McKinsey & Company. “McKinsey’s Private Markets Annual Review.” McKinsey & Company. Accessed July 30, 2024. URL: https://www.mckinsey.com/industries/private-capital/our-insights/mckinseys-private-markets-annual-review.
PwC. “Building a Valuation Creation Plan.” PwC. Accessed July 30, 2024. URL: https://www.pwc.com/us/en/industries/financial-services/library/building-a-valuation-creation-plan.html.
