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PRIVCAP In Partnership with


A roundup of thought leadership about
private equity portfolio operations
“In difficult times, the operating
expertise that we have really
comes into play. . . We get to
make investments that perhaps
we would not have been able to
make in a more robust time.”
–Don Gogel, CEO, Clayton, Dubilier & Rice

Table of Contents

05 Foreword 14 Franchise Fast-Forward: 27 Baird’s Healthcare

McGladrey’s National Private Equity How Riverside Grew AIA Company Revivalist
Leader Don Lipari introduces the 2015 The Riverside Company’s Ron Michael Bernstein joined the operations
Operating Partners Yearbook. Sansom talks about investing in team at Baird Capital after a career in
AIA Corporation. the healthcare industry.
06 Editor’s Letter
A note from Privcap Managing Editor 15 Creating Carve-out 28 The New Era of
Ainslie Chandler. Success Private Equity Operations
How companies can use a phased Private equity firms need to differentiate
07 Operations in Action approach to get off a transition themselves with operations teams.
Sun Capital’s David Mezzanotte services agreement faster. Experts from RSM Riverside, and
discusses the firm’s most profitable exit, MidOcean explain how.
Emerald Performance Materials. 18 How FFL Uses
Operating Partners 30 How LPs Vet Operators
08 Smooth Operators John Roach and Aaron Money of FFL Two major investors discuss their
PE operating partners from Partners Partners discuss how the firm’s approach to vetting operating
Group, Argosy, and Riverside on their integration of an operations team platforms of GPs.
role, compensation, and deal partner is unique.
relationships. 32 Operating Platforms
20 Operating Partners, Compared
10 Finding Strength During the Bain Way Privcap looks at the operating
Economic Weakness platforms of 10 private equity giants.
Bain Capital’s Steven Barnes on the firm’s
Don Gogel of Clayton, Dubilier & Rice Portfolio Group.
discusses how operating partners helped 35 Everyone Says They
the firm’s portfolio companies. 21 Carving Out a Career Have the Best Operating
in Operations Model
11 Notable Quotes About
Insight Venture Partners’ Hilary Gosher
Operations Commentary by Privcap CEO and
on the evolving role of operating partners. Co-founder David Snow.
Comments from experts about
influential news in 2014. 22 Paying Operating
36 Operating People
12 Translating Financial A roundup of news from 2014 about
Privcap speaks with Korn Ferry’s
Operations to PE Joseph Healey and Ben Sanders
private equity operating professionals.
SunTx’s Andy Kerner tells how a career about operating partners’ role
in financial operations translated to and compensation. 38 How to Choose an
private equity operating partner. Operations Consultant
24 Are Monitoring Fees Tech sector veteran Mauro
13 SEC: Careful How You Actually Dividends? Bonugli of RSM on key trends in
Pay for Operations Two tax experts discuss the IRS’ focus private equity operations.
Excerpts from a speech by SEC on funding services provided to
director Andrew Bowden. portfolio companies.

Privcap Reports • 2015 Operating Partners Yearbook / 4


Why Operating
Partners Matter

he role of the operating partner has evolved greatly in the past decade. As
private equity firm leaders have realized that financial engineering is no longer
sufficient to produce attractive returns, particularly in the wake of the financial
crisis, operating professionals have become an essential part of the private
equity investment process.

Today, operational professionals are responsible for a greater component of private

Don Lipari equity fund performance than ever before. Operations teams must scrutinize portfolio
National Private Equity Leader companies’ workings for more efficient ways to run the businesses. They also must look
RSM externally for growth, whether that be entering new markets from a geographic or a
product category perspective, bolt-on acquisitions, or new applications for an existing
product or service. Increasingly, operating partners drive these strategies.

At RSM, we know just how important operating professionals are to the private equity
sector. Our private equity practice works shoulder to shoulder with private
equity firms and their operating partners at every stage of the portfolio company
improvement, starting with pre-investment due diligence work, where we help firms assess
risks and opportunities.

From there, our program is designed to positively impact fund-level value by enhancing
enterprise value of individual portfolio companies. With our depth of solutions, global
capabilities, and experience, we are able to strategically apply our services to provide
maximum value at any point in a fund’s life cycle.

As operating platforms continue to evolve, and as the role of operating partner continues
to evolve with them, RSM will be there to act as a partner in improving portfolio company
performance. We hope you enjoy the inaugural Operating Partners Yearbook, which
offers a wealth of insightful views on the successful integration of operating partners into
private equity firms. ■

Privcap Reports • 2015 Operating Partners Yearbook / 5


Introducing the 2015

Operating Partners Yearbook

elcome to the 2015 Operating Partners Yearbook. Of the vast range
of global private equity–related topics covered by Privcap since our
launch, the rise of the operating partner is among the most popular with
our global audience of private equity professionals.

This isn’t surprising—the operating function within private equity firms has become the
Ainslie Chandler driver of portfolio company performance and, by extension, of returns. Without strong re-
Managing Editor turns, private equity recedes as an asset class.
Proudly produced by Privcap in partnership with RSM, this report taps into Privcap’s
extensive network of experts who provide comprehensive intelligence on issues relating to
the role of the private equity firm operating partner.

The yearbook features fascinating insights from key private equity professionals and con-
sultancies–including experts at Bain Capital, Siguler Guff, Baird Capital, Clayton, Dubilier
& Rice, The Riverside Company, Sun Capital, Korn Ferry, and RSM–who explore topics
such as how operating professionals add value at portfolio companies, what a ca-reer as
an operating partner looks like, and how limited partners conduct due diligence on a PE
firm’s operating team.

For more insights into the world of the private equity operating partner, be sure to watch
out for Privcap’s ongoing coverage of the rapidly evolving field throughout the year.

Enjoy the report. ■

Privcap Reports • 2015 Operating Partners Yearbook / 6


Privcap: You were in charge of with them in the due-diligence phase,

the recent exit of Emerald sometimes not. We’re so busy on the
Performance Materials. How operations team, working with our
did you originally source the more than 60 portfolio companies,
opportunity, and why were that we don’t have a lot of time to be
you attracted to that deal? involved in due diligence.

Mezzanotte: Emerald Performance You have mentioned that one

Materials was assembled from five of the most important things
business units that we acquired from you did was to restructure
Lubrizol in 2006. They were these various divisions. What
fundamentally good businesses, just does that mean, and how was
under-invested and, we felt, that executed?
Mezzanotte: With the five business
How did you and your team units that we acquired, we realigned
execute on a plan to improve those into four strategic business
the business? And is that units, made sure we had solid
indicative of the way Sun David Mezzanotte, Sun Capital management teams responsible for
Capital typically forms a team each of those four, and then we

to execute a deal? immediately started to look at what
they produced, where and how. For
Mezzanotte: Our approach at Sun each of those, we either exited them
with Emerald was pretty standard or we increased prices to the point

in Action
from our playbook. Our deal team where it made sense to keep them in
sources these acquisitions. Once the portfolio.
they’re in the fold, we have an op-
erations team—which comprises, in You mentioned the drivers of
total, about 20 percent of the popu- Sun Capital managing director David success, but how was it that
lation of Sun Capital—that begins to Mezzanotte tells Privcap about the firm’s all of the stars aligned for
engage with the acquired business. this deal?
most profitable exit to date, the 2014 sale
How was it structured? of Ohio-based chemicals group Emerald Mezzanotte: It really is attribut-
Performance Materials, and how the firm’s ed to the hard work that we put in
Mezzanotte: I’m the operating operational expertise contributed to the with the company around restruc-
managing director on the account, turing and investing at the appro-
but in the beginning there’s a
deal’s success. priate time, and in the appropriate
managing director from our locations for growth. There proba-
transaction team that leads the “I am the air traffic bly was some good fortune involved.
actual acquisition. That same person controller for that interim The product that we chose to invest
will be around at the end when it’s most aggressively in is called K-Flex,
time to do the divesture. I am the air period while we’re trying a non-phthalate-based plasticizer.
traffic controller for that interim
period while we’re trying to grow
to grow value at Phthalates have some environmental
issues, so slowly but surely, the world
value at the company. the company.” is shifting from phthalate-based
plasticizers to non-phthalate-based
How much communication do
–David Mezzanotte, Sun Capital plasticizers. In 2011 and ’12, we
you have with the transaction authorized two major capital projects
Mezzanotte joined Sun from logistics services giant CHEP Interna-
partner before the deal tional, where he served as COO for three years. He previously that came online in ’12 and ’13, at
is closed? spent six years with AlliedSignal/Honeywell in a variety of execu- a total cost of about $25M. These
tive roles and spent 15 years with E.I. DuPont. He holds a Bachelor investments doubled our K-Flex
Mezzanotte: It depends on the of Science, a Master of Science, and a Ph.D. from the University of capacity, and they have subsequently
particular deal. Sometimes we interact Notre Dame. been sold out. ■

Privcap Reports • 2015 Operating Partners Yearbook / 7


Three private equity operating partners open up about their
role in the world of private equity, how compensation is structured, and
their relationship with deal partners.

Don Charlton Fredrik Henzler Ron Sansom

Operating Partner Co-head of Industry Value Creation Managing Partner
Argosy Private Equity Partners Group Global Executive Operating Partner
The Riverside Company

Privcap: Fredrik, how is the Don Charlton, Argosy Private we’re involved in the whole period—the
operating team at Partners Group Equity: I think it depends on the size of the diligence period and then in the exit
structured? private equity firm. We are a period—then we back off a little bit, and
lower-middle-market firm, so we are the deal partner takes over. On the other
Fredrik Henzler, Partners Group: We typically buying from founders and sellers hand, we do work to get the SIM right, and
are a team of 21 operating professionals who started the business. Our operating we work with the management team to get
organized in six industry verticals, and we partners are allowed to source and work them prepared for the presentation.
spend about a third of our time in the deals. In most traditional private equity
investment process, alongside the firms, there’s segmentation: There’s a deal How has the role of operating
investment team looking for companies, partner, there’s an operating partner, and partner evolved? Are you actively
doing due diligence on the companies, they play at different segments along the out sourcing deals?
developing an investment thesis and align- deal process.
ing it with the management, then winning Charlton: I would say the operating
management over to sell their company. Ron, how is the operating function partner sourcing is not typical. But it makes
Two-thirds of our time is spent implementing structured at The Riverside Company? a lot of sense. Most of the operating
the investment thesis alongside the manage- partners sitting here at the table have
ment team, given the holding period. Ron Sansom, The Riverside Company: operating experience; we run companies,
We’re involved from the beginning of the we’ve started companies. That’s a big asset
Don, does that sound similar to investment through the exit process. We when you’re up front trying to get a deal,
Argosy? help determine what investments to make; or sitting across the table from an owner


Privcap Reports • 2015 Operating Partners Yearbook / 8


“Every investment is different, but you

live off processes; there are always
processes you can put in place to make
your investments better over time. I’m a
huge believer in getting these processes
set up within your firms so that you have
some consistency.”
–Ron Sansom, The Riverside Company

who started something from their garage take comfort from the fact that you full of people with a banking or fi-
and you can identify with some of the are on the team, post-acquisition? nancial background. Are there clashes?
things that he or she went through.
Henzler: We like finding a regional Charlton: As it relates to deal partners—
Sansom: If you went back 20 years, most champion and then helping them expand whether they’re accepting of operating part-
operating partners came in when a globally. They often know their niche ners—I’d say they’re receptive. I respect
company’s in bad shape and needs help. In markets well, but they feel they need their involvement in the banking field, al-
that timeframe to the present, it’s evolved to assistance stepping into a new region. though I didn’t come from banking. I was
where operating partners are now involved in startups for 12 years before I joined this
from the beginning of the investment all the Having somebody begin to talk through firm. These operating partners respect that
way through the exit. Our operating what challenges we will face, and the we’ve run companies, and they leverage
partners don’t originate either, but we have success stories we can create together, that experience.
an entirely separate deal-origination makes it more tangible. This can be
organization. We do go along on first critical in getting the buy-in from founders Sansom: The deal team and operating
visits, which adds credibility. and managers. partners really have to work together. If you
don’t, then you have a serious issue within
Charlton: One of the ways it’s evolved It’s important for operating partners your firm. We’ve never had much of an is-
is from the LP perspective. I attended an to feel they’re part of the team, but sue within Riverside.
operating partner conference with an LP then there’s an actual alignment of
panel, and they spoke about the need for interest with the rest of the firm. Henzler: It’s important for the long-term
firms and GPs to talk about their operat- How are operating partners eco- success of an operating partner that you’re
ing resources. It didn’t used to be that way, nomically brought into the deal? seen as peers and integrated into the
but LPs looking to invest in funds are asking private equity team.
about methodology. Charlton: Some firms treat the function
separately, but I think the majority [of Sansom: There will always be some
Fredrik, is your team helping to operating partners] are going to be tension now and then between a deal
shape the macro view of the firm, included in the equity carry of the fund. partner and an operating partner. The key
even before certain companies are That’s the way it is at our department. is to work through those issues like any
looked for? professional deal team would, whether it be
Henzler: The first operating partners in corporate America or private equity.
Henzler: As a global company, it’s often weren’t part of the company; they
important we know which region we like, were external freelancers or kept as Henzler: The tensions can be valuable,
which industry we like, and where we want consultants outside of the GP. Then they because they flush out the problem you
to be overweight. We also want to find out started getting hired and put onto the cash didn’t think about. They can make you fo-
which segments and subsegments of the and bonus, and later they got carry in their cus on an issue and find a solution that
industry we’ll want to work with. deals. wasn’t there. ■

When your team is brought in to Most operating partners come from

meet with potential sellers, what corporate backgrounds and are
questions do they ask? Do they plugging into private equity firms

Privcap Reports • 2015 Operating Partners Yearbook / 9


Finding Strength During

Economic Weakness
Don Gogel, CEO of Clayton, Dubilier & Rice describes how operating partners
helped the firm’s portfolio companies prosper in an economic slump

vidual companies, is what makes private operating executives that could work closely
equity exciting. with good-selling corporations.

We have invested pretty steadily through We proposed transactions in which the

this last cycle, about $1B a year each year selling corporation would retain anywhere
for five years. That’s what we had hoped to from 41 to 49 percent of the total equity.
do in our 2009 fund. But even in these diffi- We’d pay what we thought was a fair price
cult times, we’re able to put money to work on the earnings of the company that day.
if we have an operating executive who can But both we and the selling company rec-
help us recognize what we will do if we ognized that if we fixed this business and
own a business. That’s not an idle question. really ride a bigger steep curve up to prof-
There’s a lot of scrutiny on that assessment. itability, there’d be a total valuation return
Don Gogel, Clayton, Dubilier & Rice The operating partner has the responsibility, several years down the road that would
and takes it very seriously, to deliver the re- meet the seller’s expectations.
Privcap: What were some recurring sults that he and the management team are
themes your operating committing to us. The key to it is we needed an operating
professionals encountered, in an partner who could convince the selling com-
exceptionally weak economy, as During the downturn, your firm did pany and its CEO and its board that we
you attempted to improve your a large number of deals of a certain could do better with this business than they
portfolio’s performance? type, and the selling corporation would be able to do alone. How could that
retained a significant stake in the be possible? Well, it’s simply a matter of
Gogel: In difficult times, the operating ex- business and turned over the keys focus. That’s the magic of private equity.
pertise we have really comes into play. to your firm. Why was that format We bought some of these businesses from
As a result, we see different opportunities. appropriate at the time? parent corporations that have 100 strategic
We get to make investments that perhaps business units. We put all of our intention
we would not have been able to make in Gogel: In a difficult period, a number of into making three investments a year, and
a more robust time. I say that because in a businesses that might have been we have very talented people to do that. ■
period like this, even some of the put out to market in a more typical auction
best-positioned companies are going to could not really withstand the scrutiny,
suffer reversals in performance. As a result, because they didn’t have the results. It’s
the valuation of those companies is going to very hard to sell a business when it has
be diminished—and, of course, not only on declined in both revenue and profitability
a multiple basis, but also the base of earn- over a year or two-year period. The deal
Gogel is Clayton, Dubilier & Rice’s Chairman and
ings on which you’re able to buy the com- flow just slowed down. The corporate seller
Chief Executive Officer. He has been with the firm
pany is depressed. was struggling with valuation concerns.
for more than 25 years and previously served as a
partner at McKinsey & Co and a managing director
Now, seeing through that and believing that It was a time that required some innovative at Kidder, Peabody & Company. He holds degrees
there will be a recovery, both in the broad- deal structures. Fortunately, we had the rep- from Harvard College; Balliol College, Oxford
er economy and in the fortunes of the indi- utation of being corporate-friendly, of being University; and Harvard Law School.

Privcap Reports • 2015 Operating Partners Yearbook / 10


Notable Quotes
About Operations

ollowing an eight-year holding period, Los Angeles private
equity firm Platinum Equity announced the exit of Acument “At a time when a lot of
Global Technologies, a company which provides mechanical suppliers were going out of
business, we buckled down
fastening products to the transportation market. The company was and made some difficult
sold to Italian manufacturer Fontana Gruppo. but necessary decisions in
order to survive and ensure
continuity of supply. Acu-
Platinum acquired the company in 2006 from Textron Inc., but the
ment aggressively scaled its
investment did not go as planned. According to the firm, begin- cost structure while work-
ning in 2008, Acument “faced rapidly falling revenue caused ing closely with customers,
lenders, and other key
by economic dislocation and steep declines in global automotive
stakeholders to stabilize
production. Platinum Equity worked with Acument management to the business.”
develop and execute a global restructuring initiative.”
–Platinum Equity partner and president
of portfolio operations Bryan Kelln
A number of Platinum executives weighed in on the operating plan
and execution that allowed Acument to survive and thrive through
a very difficult economic period.
“Acument emerged from
the crisis a much stronger
competitor in the fastener
industry, with a healthy
“Acument is a healthy, thriving business today and balance sheet and an even
will be a great fit within Fontana’s portfolio. Like many greater focus on operational
automotive suppliers, the company faced a lot of ups and performance and custom-
downs over the past eight years. This successful outcome er service. As a result, we
reflects the hard work done by the people at Acument were well positioned to
and is a testament to Platinum Equity’s ability to steer its invest in and grow our
portfolio companies through good times and bad.” transportation businesses
going forward.”
–Platinum Equity partner Bob Wymbs
–Acument CEO Patrick Paige

Privcap Reports • 2015 Operating Partners Yearbook / 11


A Translating
ndy Kerner found his operating partner. Kerner became
way to private equity firm chairman of Houston-based Ranger
SunTx Capital Partners by Offshore, a subsea construction and
chance, after working for a diving company that works in the

series of companies as chief financial offshore oil and gas business, help-
officer. ing build new pipelines and facilities
and maintaining and repairing ex-

He had retired from his work in isting ones, performing inspections,
financial positions and was working and doing decommissioning work.
in the nonprofit sector of affordable
housing when he went to a golf SunTx acquired Ranger in early

to PE
tournament in Oklahoma and met 2010. “It was a small shallow-water
SunTx founder and managing diving business,” he says. “It’s now
partner Ned Fleming. one of the most highly certified
diving businesses in the world, and
“We started talking, and in we’ve expanded our operations to
December of 2009, I took an office When Andy Kerner was invited to join deeper waters and to international
at SunTx without knowing exactly markets.”
what I was doing,” Kerner says. He
SunTx as an operating partner, he wasn’t
had a wealth of experience from sure what the position entailed. He soon Kerner says being “a financial guy
working in the PepsiCo organization found that his experience as a veteran CFO by trade” has been helpful in his
and subsidiary Frito Lay, along with had prepared him for the job. transition to operating partner. “It’s
Texas-based Centex Homes, as CFO. a great role,” he says. “I don’t think
it’s for everybody. You need to be a
“I was a very hands-on operational jack-of-all-trades.”
CFO,” he says. “I’m not an account- “We pay the managers
ant by trade. I’ve run very large The position also requires under-
financial organizations for many to do their job and don’t standing the fine balance of dealing
companies with a strategy and oper- want to creep in to tell with the existing managers at portfo-
ational element.” lio companies. “We pay the manag-
them how to do their job. ers to do their job and don’t want to
His first task for SunTx was looking at
Carolina Beverage Group, a poten-
What I’ve found is, that creep in to tell them how to do their
job,” he says. “What I’ve found is
tial investment. It eventually became requires a heavy dose of that requires a heavy dose of
a portfolio company in the summer
of 2010, and Kerner stepped into
relational skill sets.” relational skill sets.”

the operations side of the business –Andy Kerner, SunTx The founders of SunTx had opera-
as a director, working side by side tions backgrounds, Kerner says, and
with management. “That was a great that is a focus for the firm. The cur-
deal, very traditional equity and Kerner previously held senior executive and financial management rent CFO at Ranger Offshore was
bank debt on that one,” he says. positions at Centex Homes, and CFO roles with the viaLink Com- previously an associate at SunTx,
pany and Cameron Ashley Building Products. He also had senior
Working at Carolina Beverage was and Kerner mentored him to take on
financial executive roles at PepsiCo and unit Frito Lay in the U.S.
“right in my wheelhouse,” he adds, the position. He says that having op-
and Europe. He has an M.B.A. and B.A. from the University of
because of his work experience at erations knowledge is valuable in the
Texas in Austin.
PepsiCo. world of private equity deals.

The SunTx partners then asked Kern- “If you’re going to be a deal person,
er to take on an expanded role an understanding of how to run a
within the firm, with a new title of company is critical,” Kerner says. ■

Privcap Reports • 2015 Operating Partners Yearbook / 12


SEC: Careful
How You Pay
for Operations Andrew Bowden, SEC

One of the most closely watched trends in private equity operations in 2014 was the SEC’s
stated scrutiny of how private equity firms pay for the operating talent and resources they
deploy at the portfolio level. The issue was highlighted in a speech given by SEC director
Andrew Bowden at an industry conference in May. Below are excerpts from that speech.

Within OCIE [Office of Compliance instruct a portfolio company it controls to advisor’s collection of fees and allocation
Inspections and Examinations], we have hire the advisor, or an affiliate or a of expenses. When we have examined
been sharpening our understanding of the preferred third party, to provide certain how fees and expenses are handled by
private equity industry and our strategies to services and to set the terms of the advisors to private equity funds, we have
engage with you to fulfill our important engagement, including the price to be paid identified what we believe are violations of
mission to protect investors and the integrity for the services…or to instruct the law or material weaknesses in controls over
of our markets.… company to pay certain of the advisor’s 50 percent of the time.
bills or to reimburse the advisor for certain
“We believe that most people in the expenses incurred in managing its “This is a remarkable statistic.… Some of
industry are trying to do the right thing—to investment in the company…or to instruct the most common deficiencies we see in
help their clients to grow their business and the company to add to its payroll all of private equity in the area of fees and
to provide for their owners and employees. the advisor’s employees who manage expenses occur in the firm’s use of
We therefore believe that we can most the investment. consultants, also known as ‘Operating
effectively fulfill our mission to promote Partners,’ whom advisors promote as
compliance by sharing as much information “We have seen that these temptations and providing their portfolio companies with
as we can with the industry, knowing that conflicts are real and significant.… consulting services or other assistance that
people will use it to measure their firms and the portfolio companies could not
to self-correct where necessary. Put “Many limited partnership agreements are independently afford. The Operating
anotherway, we are not engaged in a broad in their characterization of the types Partner model is a fairly new construct in
game of ‘gotcha.’… of fees and expenses that can be charged private equity and has arisen out of the
to portfolio companies (as opposed to need for private equity advisors to generate
“A private equity advisor typically uses being borne by the advisor). This has value through operational improvements.
client funds to obtain a controlling interest created an enormous gray area, allowing Many limited partners view the existence of
in a non-publicly-traded company. With this advisors to charge fees and pass along Operating Partners as a crucial part of their
control and the relative paucity of expenses that are not reasonably investment thesis when they allocate to
disclosure required of privately held contemplated by investors.… private equity funds, largely because the
companies, a private equity advisor is Operating Partner model has proven to
faced with temptations and conflicts with “By far, the most common observation our be effective.” ■
which most other advisors do not contend. examiners have made when examining
For example, the private equity advisor can private equity firms has to do with the

Privcap Reports • 2015 Operating Partners Yearbook / 13


Fast-Forward: How
Riverside Grew AIA
The Riverside Company’s Ron Sansom tells Privcap about his firm’s investment
in promotions and marketing group AIA Corporation

established our operating rhythm, with

monthly reviews, quarterly board meetings,
annual strategic plan updates and talent “The owners or
review, and a budgeting process.
franchisees were
David was looking for some marketing struggling with
people on the board, so we added one,
along with someone who knows the fran- our enterprise
chising market exceptionally well. After
fixing a technical issue, we were able to
system, and
start selling franchises again. providing a portal
Ron Sansom, The Riverside Company The owners or franchisees were struggling for them to work
What first attracted Riverside to the
with our enterprise system, and providing a
portal for them to work with our
with our
opportunity to invest in AIA? providers and to ship and input orders is providers and to
really the key to what AIA does. We spent
Franchising is one of our specialties; we’re about $2M, but it’s now one of the best ship and input
always looking for businesses in various
sectors, and our origination team contact-
proprietary systems in the industry.
orders is really
ed a parent company in the U.K. about Then we got the sales machine going. In the key to what
selling one of their units. The chairman was the beginning, it was an inbound situation
thinking the same thing and asked David where we would generate leads, but we AIA does. We
Woods, the CEO he brought in to turn the
unit around, if he wanted to sell the com-
started doing an outbound calling effort.
We grew system-wide sales at a
spent about $2M,
pany. He said he needed a partner and fi- double-digit clip through our ownership, but it’s now one
nancing, and a deal was formed after meet- other than a dip during the recession. We
ing with them. exited this company in the third quarter of of the best
The company hadn’t sold any franchises
2013, and it was wonderful.
for several years because of internal issues, We got lucky with strong management systems in the
and it was unprofitable, so they brought in and leadership. It’s one of the few cases
a CEO to turn it around. Then it began where we didn’t change anyone out: David industry.”
making money, and we thought it would be Woods was CEO, Tom Lehr was CFO, and
a good investment. they stayed. We upgraded a bit along the –Ron Sansom,
way, but there was good leadership, The Riverside Company
These are small companies, so we’re not good strategy, and it worked out well
sitting back from100,000 feet. We for everybody. ■

Privcap Reports • 2015 Operating Partners Yearbook / 14


Success How companies can use a phased approach to help
get off a transition services agreement faster and to
optimize their growth. By Dave Noonan, Tom
Byrne, and Bob Jacobson of RSM

ow did a private equity shipping, and financial reporting
firm save nearly $5M in 12 weeks, ended the TSA, and
executing a carve-out of a later added custom functionality.
$100M retail operation? The cost of the 12-week implemen-
"Removing tation was $1.8M, but it saved
It didn’t look promising at the outset. dependency on $4.8M by shaving six months off
When discussing potential strate- the TSA.
the TSA fast
gies with an IT services provider,
the provider proposed a nine-month often means Private equity firms executing
implementation cycle to develop an investing in an carve-outs in the middle market
industry-specific customized IT outside provider have the same primary objective as
platform for the new stand-alone with all their portfolio companies:
company. Meanwhile, the firm that can provide optimize exit price within a limited
would be paying $800,000 per experienced timeframe. For carve-outs, that
month on the transition services project means removing dependency on
agreement (TSA), or $7.2M for the the TSA as quickly as possible. All too
nine-month plan. leadership." often,however, firms take an “all or
nothing” approach, with a flurry
Instead, the firm decided to take a –RSM of activity starting midway through
phased approach. It implemented the exclusivity period to develop
baseline operational functionality customized systems and infrastruc-
such as order entry, receiving, ture—a risky and expensive process.


Privcap Reports • 2015 Operating Partners Yearbook / 15


company are no longer in place. When and effective strategy and execution were
combined with more complex tasks like given as the primary drivers of success.

addressing compliance and privacy issues,
a project estimated at $100,000 can easily With carve-outs, there are two main
cost 10 times as much. concerns: First, the head of a $100M
To balance risk and practical division of a multibillion-dollar organiza-
considerations, private equity firms Even more experienced buyers will benefit tion may not make an effective leader of a
should instead take a three-phase from starting the process as early as stand-alone or platform company. Second,
possible. If the likelihood of winning the management may have difficulty changing
approach to carve-out execution
bid is high, firms can use the assessment as its mindset about what the “right” systems
a foundation to begin some light planning and processes are. Managers at a $130M
and start lining up contracts, which will manufacturing division argued that forms
PHASE ONE: ensure less time on the TSA and can help and processes needed to be set up in a
Negotiate the Right Terms, buyers negotiate a more favorable TSA with certain way—one that made sense when
Pre–Letter of Intent regard to personnel and other factors. they were part of a huge global organiza-
tion but was needlessly expensive and
Firms are hesitant to invest resources in To set the right course for the carve-out, use complex for the division alone.
assessing a carve-out when faced with the the time before the LOI to start negotiating
risk of not winning the bid. This perspective the TSA, as well as to articulate strategy A smaller internal workforce can also lead
ignores the risk of winning the bid but changes for the new company. Once the to internal control issues, including improp-
severely underestimating the cost of the LOI is signed and the TSA finalized, plan- er segregation of duties and inappropriate
carve-out execution. ning for the first 100 days can commence. user/data access.

That’s what happened to one private equity Removing dependency on the TSA quickly
firm that did a carve-out of a $40M PHASE TWO: often means investing in an outside pro-
division of a $20B company. The firm vider that can provide experienced project
Remove Dependency on TSA
planned to outsource the division’s IT needs leadership and work with management and
and assumed a cost of $150,000. But the
Post-Close the private equity firm to establish short-
complexity of the business meant that it and long-term plans, facilitate and coordi-
ultimately paid nearly $1M for the work. This phase requires establishing a project nate implementation, guide analytical prior-
Had the buyer invested in a quick assess- management office and executing the ities, allocate resources, monitor progress,
ment pre–letter of intent, the firm could have 100-day plan, all while focusing on items to and ensure quality. This arrangement also
negotiated a purchase price adjustment or get off the TSA—fast. allows management to focus on its core
better terms. competencies and running the company.
A management steering committee should
A pre–letter of intent assessment is particu- provide strategic direction, define targets, Structured incentives for meeting deadlines
larly valuable for firms that have never or align resources, help champion change, will share the benefits of getting off the TSA
only rarely been involved in a carve-out sit- resolve issues, and guide results. However, faster across the entire organization and
uation. ineffective management teams can be can have a tremendous return on invest-
an issue. ment.
These firms can fall into a “simplicity trap,”
where they assume that transitioning off the In McGladrey’s 2013 Private Equity While more complex situations will require
parent company’s infrastructure is a Survey, an ineffective management team a longer timeframe, Phase 2 should
simple matter of setting up a new server or was ranked as the most common reason for typically be concluded in less than six
two. Implementing even basic functionality portfolio companies underperforming, with months. The money saved by ending the
can be difficult when the previously ineffective strategy or execution a close TSA quickly can then be put to use in
developed processes of the parent second. Similarly, management capabilities realizing the value of the investment.

Privcap Reports • 2015 Operating Partners Yearbook / 16


At the same time, it’s important to make partner or outside team, on how to increase technology, the carve-out may need
plans for the future state of the business. efficiency and effectiveness. some level of CFO advisory,
There are numerous software packages and process-improvement support, financial
platforms aimed at middle-market compa- transaction accounting, risk advisory
nies that can be implemented efficiently at a
relatively low cost and then customized as Carve-out services, and other assistance.


PHASE THREE: Components Investing

Optimize for Growth Post-TSA
The earlier that private equity firms start the
in the Right
Once the company is up and running on its
clock, the faster they can achieve success.
own, it’s time to execute the future-state
plan developed in Phase 2. Implement,
Regardless of the timeline, carve-out
execution projects have five core
track, and monitor master plan initiatives to components:
achieve the strategic vision for the carve-out. A holistic approach to carve-out execution
• Project mobilization requires a depth of capability and capaci-
A 12-to-36-month performance-improvement •Synergy and integration planning analysis ty that private equity firms may not have on
plan provides the necessary guidance and • Development of solutions and staff. Operating partners with brilliant stra-
benchmarks for optimizing value, but imple- business-case preparation tegic insights and process-improvement ex-
menting the plan often proves difficult. • Detailed design of implementation plan perience may need help sorting through the
Respondents to McGladrey’s 2013 Private • Implementation details and providing the necessary level of
Equity Survey report that management support to the internal management team,
pushback is an issue, as is a lack of Throughout the process, effective project, including the CFO.
internal resources. communication, and change management
are a must. The critical elements of Too many suppliers can lead to things fall-
When implementing information technology project management—managing risk, ing through the cracks, whereas a single
systems to optimize growth, consider budget and time control, as well as scope provider can think through the interdepend-
cloud-based computing to avoid costly up- and expectations—may overly burden encies of different items. A provider focused
front infrastructure investments and to allow internal team leaders who have other re- on handling all of the carve-out needs, in
for scalability. Software-as-a-service will sponsibilities. A project management office contrast, will be proactive towards stream-
help keep software applications up to date, should be in place to provide overall tran- lining wherever possible, addressing po-
potentially increasing exit price. Regardless sition structure and management, bring de- tential issues, and communicating to all the
of the approach, the company should have cisions and roadblocks to the steering com- relevant teams.
the necessary internal systems to measure mittee, and oversee various project teams.
results, avoiding another common road- Private equity sponsors that are unable to
block to performance-plan implementation. Education, communication, and empow- dedicate their own resources throughout the
erment are important transition agents for carve-out should invest in an outside
Private equity firms must assess manage- defusing pushback and often require an out- provider that offers a full suite of services
ment capabilities and determine if outside side resource that can serve as part of the and can coordinate internally, resulting in
help is required to ensure the right bench- transition team and as advisors to manage- one point of contact for the entire process.
marks are established, monitored, and ment, as well as assisting with implementa- Choose a provider that understands the nu-
checked off in a timely fashion. One tion. ances of carve-outs as well as the private
approach is to push accountability to equity business model and general
managers but still offer suggestions and To save time and effort, integrate project partners’ priorities. ■
guidance, either through an operating management as much as possible. Beyond

Dave Noonan is McGladrey’s National Director, Private Equity Consulting; Tom Byrne is director in the Performance Improvement Consulting Services division; and
Bob Jacobson is a principal in the Risk Advisory Services division.

Privcap Reports • 2015 Operating Partners Yearbook/ 17


Uses Operating
In-house operations teams are increasingly common at
private equity firms. John Roach and Aaron Money of
FFL Partners tell Privcap how the firm’s integration of
operating partners is unique.

s do many private equity firms
featuring operating talent, FFL
Partners brings in people from a
variety of backgrounds: chairmen
and CEOs, consultants, small business
managers, executive search professionals.

A managing director at FFL, Aaron Money,

says that the firm focuses on alignment
among these operating professionals,
portfolio companies, the fund, and the rest
of the firm. “Our operating partners do well
when our investments do well,” he says.
“That’s the only way to incentivize the
behavior, which is creating value in the

While operating partners do well if the

portfolio companies they work on do well
for FFL, Money says they will also
participate in the range of investments
the firm makes.

John Roach Aaron Money FFL operating partner John Roach found
Operating Partner Managing Director his way to the firm through a connection to
FFL FFL Money after time spent as a chairman and

Privcap Reports • 2015 Operating Partners Yearbook / 18


“The role of an
operating partner
means you’re available How FFL Boosted
to step in during an C.H.I.’s Performance
emergency for 90 days

or so, if need be. Your n a tight-knit industry of only four or and C.H.I. stood out when FFL looked
job is to coach and help five major players, C.H.I. Overhead at it three years later, during a rough
the management do Doors stood out to FFL Partners as a
potential portfolio company because
time in the economy. “C.H.I. was tak-
ing a lot of market share through the
their job and produce of its unique strategy of having a single downturn, and we expected that to
sufficiently good results facility to distribute directly to custom- continue because of its unique business
ers. model,” says managing director Aaron
so that the financial Money.
partners can spend The overhead garage door company
only has about a 10 percent market C.H.I.’s sales, profit margins, and out-
their time looking at share, says John Roach, operating part- standing EBITDA are the first level of
new things.” ner at FFL, but it was interesting to look metrics that FFL looked at. Among the
at as a potential investment. In August changes to C.H.I. that FFL oversaw was
–John Roach, FFL Partners
of 2011, C.H.I. became an actual in- improving material scrap performance:
vestment for FFL, and it was also where The operations crew managed to save
CEO of several companies. He says that the firm was introduced to Roach. $1M to $2M per year on steel scrap
FFL’s approach to operating partners is costs. ■
different because it doesn’t merely bring The firm had been looking for an in-
people into companies as CEOs, advisors, vestment in the building products space
or board members; it involves them from the since 2008, when the recession began,
start of a possible investment through due
diligence and sometimes through to the in-
vestment itself.

“Being involved from the start, getting

acquainted with the management and the
nuances of the company, gives you a head
start in how to deal with the company, the
people, and the issues,” Roach says.

There is a world of difference between

being a CEO of an ongoing company and
being brought in for a finite period of time
as an operating partner, Roach says. A
regular CEO has a 24-hour responsibility
to deal with issues that come up, and it’s
an acquired skill. “The role of an operating
partner means you’re available to step in
during an emergency for 90 days or so, if
need be. Your job is to coach and help the
management do their job and produce
sufficiently good results so that the
Rolling returns: FFL took garage-door market share with its C.H.I. Investment.
financial partners can spend their time
Image Source: C.H.I.
looking at new things.” ■

Privcap Reports • 2015 Operating Partners Yearbook / 19


Operating Partners,
the Bain Way
Bain Capital’s Steven Barnes discusses the firm’s Portfolio Group,
which is committed to helping build its portfolio companies

typically serve as consultants to manage- thoughtful, strategic way. Look at the

ment, rather than fill specific management massive macro-impact of the crisis of ’08
roles. That usually happens only when one and ’09. Our ability to work with our
of the firm leaders departs or has a companies and get them doing
health problem, and then it’s only a unbelievably well has been a cornerstone
temporary arrangement. of this operating group.” ■

“Our job is not to run these companies,”

Barnes has been associated with Bain since
Barnes says. “Our job is to help these
1988 and has been a managing director
companies realize their full potential more since 2000. He has held senior operating
quickly and more successfully.” roles at several Bain Capital portfolio companies
and previously held senior management
It requires a particular skill set. “You need positions in the Mergers & Acquisitions
Steven Barnes, Bain Capital the IQ—the strategic understanding and Support Group at PriceWaterhouseCoopers.

operating experience to understand where He holds a B.S. from Syracuse University
teven Barnes knows Bain Capital a company is, where you want it to be in and is a Certified Public Accountant.
as well as anyone. He joined the five years, and the road to get there. But
firm in 1998, four years after its you also need a special sauce called EQ
founding, and now runs its private [emotional intelligence]. You need the part-
equity group in North America. He is also nership skills and the ability to develop
intimately familiar with Bain’s founding con-
cept of value-added support, having led the
trust-based relationships with management
teams so you can partner with them and
“Our job is not
development of its Portfolio Group, which help them get their companies to their full to run these
works with management teams to outline
and execute strategies to help portfolio
companies. Our
companies deliver on their potential. As the Portfolio Group has grown—it’s now job is to help
“Working with portfolio companies was
at 70 executives worldwide—it has recruit-
ed a number of specialists in areas such as
these companies
something that Bain Capital pioneered,” talent management and sales growth. realize their full
Barnes tells Privcap. “We started with a
bunch of consultants and operating execu- Success is not always the case, of course. potential more
tives who came together into the private eq- But the Portfolio Group has done a good quickly and more
uity business. As the firm grew, the size of job of minimizing the failures.
our deals grew, and the complexity of what successfully.”
we did grew, we decided in 1999 to form “They happen in every situation,” Barnes –Steven Barnes, Bain Capital
a dedicated portfolio group.” says. “There are macro changes and
microdynamics of an industry. That’s why
Today, the team collaborates with deal we have the operating team partnered with
teams from due diligence to exit. When a the deal team—to make sure we’re doing
deal closes, members of the Portfolio Group everything we possibly can, reacting in a

Privcap Reports • 2015 Operating Partners Yearbook / 20


hen Hilary Gosher the notion—is still being invented,”
started with venture she says. “But we are going to start
capital and private to see innovation in the services [of-
equity firm Insight fered] and a more diverse range of
Venture Partners in 2000, the role of people joining the industry.”
operating partner barely existed.“I
took a risk at that point,” she says. Gosher says more private equity
“The title was ‘project manager.’ It firms are starting to use operations
was a whole new position.” teams as a strategic weapon, pre-
and post-acquisition. During the bid
Gosher, who manages Insight process, operating partners can be
Onsite, the firm’s 14-person used to determine how to win deals
operations and growth team, was by becoming the target company’s
recruited after working in management’s first choice or having
management consulting. Her a point of view on the business that
previous positions were at The changes the bidding strategy. After
Monitor Group, where she worked the deal, operating partners are
with healthcare, technology, and being used to execute an investment
Hilary Gosher, Insight Venture Partners
infrastructure companies, and thesis and change the risk curve.

Marketspace, an e-commerce firm
focused on startups and online “I don’t think people thought about
retail businesses. that five years ago,” she says.

Out a
Gosher advises on strategy, sales,
“I was excited about applying what I marketing, and M&A, and she sees
had learned in a big context to small- the role of the operating partner as
er companies,” Gosher says. The focusing on both the “minutiae and

Career in
idea of testing strategies in real time big picture,” striking a balance
and gaining immediate between finding and implementing
feedback and results was also incremental changes that create cash

appealing, she says, as was the efficiency or achieve a better
prospect of working with use of resources, and taking a
“optimistic” entrepreneurs. big-picture view of the competitive
landscape, including customers and
Insight Ventures introduced the role macro changes in the market. Or,
Insight Venture Partners’
and the broader operations team to as she says, “making sure the
help bring an “empirical rubric” to
Hilary Gosher explains how the role business doesn’t miss market
help management make decisions, of operating partner has evolved opportunities, in addition to maximiz-
according to Gosher. ing existing opportunities.”

Private equity professionals had “The term ‘operating Since joining Insight, Gosher has
previously gotten by more on, “gut
feel” but companies had grown to a
partner’ and the notion worked with more than 90 software
and Internet companies. She current-
point where they needed to is still being invented. ly works with Datasift, Drillinginfo,
supplement that with data. Mimecast, and OverDrive. She has
It’s in its infancy.” previously worked with Primavera,
Almost 14 years in, Gosher says the –Hilary Gosher, Insight Venture Partners which was bought by Oracle; Argus
role of operations professionals Software, which was purchased by
continues to evolve. Gosher is an adjunct professor at NYU’s Stern School of Business Altus Group; and Scriptlogic, which
and holds an MBA from INSEAD, as well as law and economic was bought by Quest Software. ■
“The term ‘operating partner’—and history degrees from South Africa’s University of Natal.

Privcap Reports • 2015 Operating Partners Yearbook / 21


Paying Operating
Privcap spoke with Korn Ferry’s Joseph Healey and Ben Sanders about the
thorny issue of the operating partner’s role and compensation

companies, and it was better to hire an

expert to do that rather than try to do it
themselves. That created demand for
operating partners, too.

Healey: Even firms that don’t have an

operating partner bench and don’t have a
roster of people listed on their website as
operating partners, they seek to draw in
those capabilities on a project-by-project
basis. They’ll have senior advisors or
former CEOs of their own portfolio
companies they’ve come to know, and
they seek to draw in that expertise on an
as-needed basis, as opposed to making
Joseph Healey and Ben Sanders of Korn Ferry
them a part of the infrastructure. Even if the
operating partner team isn’t deep, the
“During the recession in 2008-2009, a lot need to have a greater degree of sensitivity
to operating issues is at play across
of private equity firms realized they the industry.
needed to get involved with companies,
To what degree do operating
and it was better to hire an expert to do executives have their pay tied to the
that rather than try to do it themselves.“ deal they have been assigned,
compared with the health of the
–Ben Sanders, Korn Ferry whole fund? Is there a perception
among limited partners that you’re
a real operating partner if you are
Privcap: Have private equity firms It’s hard to find firms that don’t say incentivized by the whole fund,
reached a point where they have they add operating value, yet not versus a hired gun with just the
conceded that they need to lift their every firm out there has a deep deal that you hunted?
operating game and bring more bench of people with a background
operating talent in-house? in running corporations. Healey: Limited partners care about the
outcome, and the individual firms leave it
Sanders: It’s something that can be Sanders: One reason why you see more to themselves to determine what’s optimal.
afforded by large-cap firms. Most large-cap and more operating partners is that LPs If you want to think about it in a theoretical
firms have some version of operating look for that when they evaluate whether sense, the idea is that you have a group of
partners, with many different functions to invest in a fund. So being able to speak very smart people—some of whom have an
within the firm. If you look at a lot of the to that is important. During the recession investment background, some an operating
middle-market firms, they might have one. in 2008-2009, a lot of private equity firms background—whose interests are aligned
Not every firm follows the same model. realized they needed to get involved with to a common outcome across a portfolio.

Privcap Reports • 2015 Operating Partners Yearbook / 22


“This is an idiosyncratic industry, and

every firm has their own approach. What
you find is a range as to whether they’re
full-time, permanent members of the team
or they’re brought in on an ad hoc basis.”
–Joseph Healey, Korn Ferry

There are some firms that think they’re place. The fourth is a former portfolio What percentage of the operating
backing great CEOs, and they don’t feel company CEO of the private equity firms, partners have a direct interest
they need an operating partner on their or someone they’ve brought in from the in the incentive, whether it’s
bench to oversee their activities. Their outside to look for and run deals. portfolio-wide or with specific
objective is to let the CEO do what he or companies?
she does well. Healey: This is an idiosyncratic industry,
and every firm has their own approach. Healey: The answer to that is probably
Sanders: The one distinction that comes What you find is a range as to whether very high. Some have specific economics
to mind is that for the large-cap firms, they they’re full-time, permanent members of the and a specific deal, and some have carry
probably would have an operating partner team or they’re brought in on an ad-hoc in the broader pool. That might be more.
for a specific industry sector rather than basis. You could have senior advisors who Of those who have direct participation, that
going across five or six, whereas for a are less than full-time and standard might be 50-50.
midmarket firm, the operating partner operating partners, oftentimes deeply
would focus more firm-wide, especially if it’s embedded in the investment team, and the Sanders: If you go back, six, eight, 10
someone with a finance background, and pay structure is identical to the investment years ago, it was probably a much lower
they’re really there to help the CFOs. team members. percentage, and it was more people being
paid on a project-by-project basis and
Healey: Some feel the need to build the Are you sensing reluctance or a being paid cash rather than carry, much to
operating partner and make it an in-house hesitation on the part of some firms their chagrin. But now it’s become a more
capability. In some models, there’s one to open up their partner economics highly valued function, and the best people
senior operating partner who’s effectively and bring in these new people who are going to want carry, whether that’s firm-
a general contractor or the architect of the may or may not have an impact on wide or deal-specific.
operating-partner kind of thinking within the profits?
firm. They create this network of operating Healey: And it shouldn’t be overlooked
partners that can be drawn in on a Healey: I don’t think there’s much of a that some operating partners are not pur-
one-off basis. choice, to be honest. There’s an expense to suing these types of roles purely for kind
be incurred. Sometimes these expenses can of W2 cash income or even carry partici-
What are some models that firms be billed back to the portfolio companies pation. They may be in a position to seek
use to integrate their operating tal- directly, and some firms underwrite the cost highly attractive co-investment opportunities
ent into their investment teams? of a very large group and then, throughout with the private equity firms.They might find
the course of a year, they bill back the costs that to be much more valuable, so they can
Sanders: There are four used regularly. of that group on a project-by-project make their own kind of direct investment
One is for business development, where basis as the functional expertise is brought in these companies with the benefit of hav-
they call them a senior advisor or operating to bear on individual companies. ing done their own due diligence on these
partner, and they have advisor contacts, deals, because they are working side by
evaluate the investment opportunity, and Sanders: It’s always a challenge to get side with the private equity firm. It is very
then win the deal. The second is for func- the investment side of the firm to share their idiosyncratic, depending on the firm and
tional expertise, like an investment sector economics, but they look at it as an the circumstance and even the individuals
within a private equity firm. Another is more investment decision. Is this operating who are in an operating-partner capacity. ■
of a generalist, perhaps a former CEO or partner that we’re going to bring in going
a business president who is going to work to create more value than he’s going to cost
with the management team once they’re in over the life of the fund?

Privcap Reports • 2015 Operating Partners Yearbook / 23


Adam Weinstein, New Mountain Capital, and Rick Bailine, RSM

Are Monitoring Fees

Actually Dividends?
Two tax experts discuss the IRS’ focus on a common method for
funding services provided to portfolio companies

When a private equity sponsor charges a “monitoring fee” to a portfolio company,

should this be treated as income or dividends? Rick Bailine of RSM says the U.S.
Congress is looking into whether the policy should be
switched from the former to the latter, a change that would have broad
implications for how private equity partnerships fund the services they provide to
portfolio companies. At issue, according to our two experts, is the common
practice of splitting fees with limited partners–a proportional arrangement that
some argue makes these fees more like dividend payments and less like income.
The debate is another example of accepted private equity practices
being increasingly scrutinized by the government.

Privcap Reports • 2015 Operating Partners Yearbook / 24


“It's interesting that Congress is choosing

to look at this at a time when changing
the characteristic might benefit the
shareholder and the management company
by giving them a lower tax rate.”
–Rick Bailine, RSM

Privcap: I’d like to dive deeply into the dollar amounts you’re talking about, truly causing the controversy. If a portfolio
some important trends in the world these are usually relatively small fees, from company—typically a C corporation—pays
of tax and private equity. Let’s start as low as $100,000 for a $100M-sized a fee to someone for providing manage-
with one where people predict there company to $1M a year. There are outliers ment services, that’s simply an ordinary and
may be some movement. It has to in both directions. necessary business expense to the portfolio
do with the treatment of the company, which is fully deducted. The
advisory fees GPs charge to their From a GP perspective, it’s getting rumblings we have heard coming from
portfolios, often called “monitoring captured. It’s coming in as ordinary Capitol Hill—that’s what has started
fees,” and how they get treated at income, as fee income, and then flows to the focus.
the portfolio level and at the GP level. the partners if it’s a partnership. Usually it
comes into the management company itself. There has been a great deal of focus by
Adam, can you set the stage and The GP is then offsetting this and the IRS and Congress for many years on
talk about what the practice is now reducing their LP’s management fees in the any flow of cash from a C corporation to
by way of taxes and these next drawdown that they do customarily a shareholder. Probably the most litigated
monitoring fees? with transaction fees and other things. issue in the history of our internal revenue
Whenever the fee offset we’ve talked about code is called “debt equity.” It is a
Adam Weinstein, New Mountain a lot in the industry, 50 percent, 65 corporation making a payment of interest,
Capital: Today, the way it works is percent, or 100 percent—it actually just which would be deductible to the
often, during a negotiation, you’re buying a gets credited back to the LPs effectively corporation and income to the recipient. Or
company—there are minority shareholders through that. they are paying a dividend, which would
sometimes coming in; sometimes it’s going be nondeductible to the corporation and
to be 100 percent owned by the private LPs are less focused on it these days, taxable to the recipient.
equity fund. You negotiate to have some because many firms have gone to 80
type of advisory or monitoring fee that’s percent or 100 percent fee offset. From The difference is, the way our code stands
paid on a quarterly or annual basis to the their perspective, it’s helpful to get advisory today, it’s not an even balance in the sense
private equity firm. This is intended to help fees from the company, because it reduces that if the portfolio company is paying a
mitigate some of the costs that go into just their management fee burden. That’s the fee, the portfolio company gets a
overseeing a portfolio company. Some practice today. deduction, but then, as Adam said, the
private equity firms don’t charge any travel recipient has income. If it were to be
back to their funds, so this would help offset From a tax perspective at reclassified as a dividend, in fact, the
travel. Others are viewing it as, effectively, the portfolio level, how are these portfolio company would not have a deduc-
a fee for helping to oversee the company. fees treated? tion, but the recipient would also have a 20
percent or a 23.8 percent tax rate, not the
In the grand scheme of transaction fees and Rick Bailine, RSM: That’s what’s typical 39.6 percent.


Privcap Reports • 2015 Operating Partners Yearbook / 25


It’s interesting that Congress is choosing to

look at this at a time when changing the
characteristic might benefit the shareholder “ the long term, if you are the
and the management company by giving
them a lower tax rate.
majority owner of a business, less tax
deductibility is ultimately going to hurt
Weinstein: The specific area they focused
on is where monitoring or advisory fees are
your outcome to the business.”
going to the private equity firm and/or –Adam Weinstein, New Mountain Capital
others in proportion to their ownership, as
Rick said. When you have a private
equity firm that owns 80 percent of a
business and a minority shareholder that
owns 20 percent and there’s a $100 fee Importantly, and Adam said it exactly changing what was income and
getting paid annually, with $80 going to correctly, if you are providing services, why more into something of a dividend.
the private equity firm and $20 going to would management fees be going to
this minority shareholder, they believe it’s others if you are the provider of the Bailine: Which brings us to the next
simply a dividend. services? That’s exactly the type of thing the question. I don’t think Capitol Hill is that
government has looked at almost since the foolish. It’s one thing for us to say, “If they
Ironically, there is a different argument if inception of the code. were to change the rule and say, ‘This
you are an 80 percent owner and you’re should be a dividend, because it’s being
getting the monitoring fee all to you and Typically, distributions to shareholders on paid pro rata with regard to your share-
none is going to the minority shareholder. a pro-rata basis are viewed, at least by the holders. Therefore, it’s nondeductible to
Actually, in this case, that is helpful to the government, as dividends. They will look your portfolio company.’ “ It’s not going
argument and fact pattern. closely at whether or not the payments are, to take them long to realize the point that
in fact, for services. Are you actually Adam illustrated, that you’re now having a
They’re focused on it, and you said it rendering, the services? Are the payments benefit to the private equity group.
exactly right, that on the face of it today, it commensurate with the services you are Maybe it would surprise no one if their
would cause a rate reduction for private rendering or is something extraordinary solution were that it’s nondeductible to the
equity. But obviously, in the long term, if going on here? portfolio company and we still believe it
you are the majority owner of a business, should be taxed at 39.6 percent to
less tax deductibility is ultimately going to Weinstein: If you’re at 100 percent offset the recipient.
hurt your outcome to the business. If you do and you get $1 from this type of monitoring
it in a way that is proportional, that is the fee and you reduce your management fees Weinstein: That is the entire argument on
thing most susceptible to be changed. by $1 in the next year, to the point Rick carried interest, which is why legislative
made, you now have a tax rate of 23.8 action is needed for it–because it is a
Bailine: That’s exactly right. The cash percent on income, and you are reducing conversation. The three of us are in the
flows from a C corporation to a shareholder management fee income, which is always partnership; the two of us are LPs, and
always have been scrutinized closely and at the 39.6 percent rate, presumably, if you’re the GP. I would only pay capital
typically, for anything that was distributed you’re in the highest tax bracket on the gains rate on the income that comes to me
to a shareholder on a pro-rata basis in management fee. So there’s a windfall for from that partnership. Nobody’s disputing
proportion to their shareholdings, the the firm if this type of thing happens. that. It’s the piece of the capital gains that
government’s initial reaction almost now goes to you, which today is taxed at
uniformly will be, “If you’re paying this to There could be an interesting the same rate, and an argument is being
your shareholders based on their ownership scenario where, in an effort to go made that it should be taxed at a higher
of the stock, why is that not a dividend? after a private equity and these rate. Does that make those you look at im-
It appears to us that you’re simply making unusual fees they pay themselves, portant in making the contextual argument
distributions to shareholders with regard to the government could have an of what tax rate to charge them? ■
the stock that they own, not with regard to unintended consequence of
the services that someone is providing.” possibly creating a windfall by

Privcap Reports • 2015 Operating Partners Yearbook / 26


fter years in leadership From there, he became an
positions at healthcare executive-in-residence at Baird
companies, Michael Capital under a new platform that
Bernstein retired, shifted sponsored executives to pursue
course, and became a private equi- investments. But it was 2008, the
ty investment partner. beginning of the recession, and
Bernstein says it was evident that
His role at Baird Capital is an sourcing deals was going to be very
“investment partner with a twist,” he slow. After less than a year, he took
says. “I perceive the world like an a turnaround gig for a hedge fund,
operating partner, but my role is dealing with distressed businesses.
classic investment partner.”
Baird acquired METI, a maker of
Bernstein spent years as what he robots used by medical and nursing
calls a “serial CEO,” running a students, and Bernstein served as the
series of healthcare businesses, co-investor. The business went into
although his career began as a distress after the close, and Bernstein
lawyer at Blue Cross Blue Shield was swapped into the CEO role.
in Milwaukee. Eventually he would METI was sold two-and-a-half years
Michael Bernstein, Baird Capital
become president of that plan and later for 2.5x the initial investment.
work there for a total of 14 years, He continued in the role as divisional

with a stint as an executive at the president of healthcare at that
University of Wisconsin’s medical successor company until April of
services plan in the middle. Of that this year.

job in healthcare delivery, he
recalls, “I’m a bit of a change That was when the conversation
agent, and that was a business started with Baird about becoming an
where my constituents didn’t want operating partner specializing in the

any change.” healthcare sector, but it evolved into
Bernstein becoming an investment
He was later rehired by Blue Cross partner. “This is the first time in the PE

to be a senior vice president of firm’s long history that it has a partner
strategy and planning. He became dedicated to only healthcare
head of the company and helped investing,” he says.
take it public—the second-to-last
Blue Cross in the country to tran- He’s adjusting to the role from his
sition to a for-profit. The company Michael Bernstein spent much of his serial CEO status and calls it “more
was sold to WellPoint in 2003, and career as a “serial CEO” of healthcare kinetic but less purposeful,” compared
Bernstein retired at the age of 43, with running a business, where little
companies but recently moved into the
marking the beginning of his energy is wasted. “In PE, there’s a lot
transition into private equity. operating-partner-like role of investment of energy spent learning about and
partner at Baird Capital. He explains sourcing deals that may never
Bernstein says he began by “trying how he got there, and why this career happen. The partnership model is
my hand at small business.” He took also different from being a CEO, as
change was a good one.
over running a small healthcare there’s a lot of decision-making done
business from a former colleague, Prior to joining Baird Capital, Bernstein held executive positions by consensus,” he says.
and four years later it was sold for at Leprechaun Inc., Innovative Health Strategies, Cobalt
$81M. “From that, I learned how Corporation, the University of Wisconsin Medical Foundation, “I’m liking that. Running a business
much wealth was generated from and University Health Care. He received degrees from the is very lonely, and being in private
small businesses,” he says. University of California and the McGeorge School of Law. equity isn’t nearly as lonely,” he says.■

Privcap Reports • 2015 Operating Partners Yearbook / 27


The New Era of

PE Operations
In an increasingly competitive deal market, private equity firms need to differ-
entiatethemselves with their operations teams. Having the right professionals
on hand to improve the performance of portfolio companies is key. Here are
five key takeaways from an illuminating expert conversation.

Dave Noonan Frank Schiff Steve Stubitz

National Director Private Managing Director Operating Partner
Equity Consulting RSM MidOcean Partners The Riverside Company

1 Operating platforms differ from clients,” says Frank Schiff, a managing “We work with a lot of firms that outsource
firm to firm—and differentiation is director at MidOcean. “So we had to their operating team out of a very specific
critical to winning deals. figure out ways to differentiate ourselves vertical with specialists who bring expertise
in the marketplace. And one of the ways to a very specific type of transaction.”
The operating platform is now among the we did that was to surround ourselves with
most vital assets at any private equity firm. management affiliates to make us more 2 The days of pure financial
It plays a crucial role from acquisition to attractive to management teams.” engineering to generate returns
exit. “It works with the deal teams to help are over—firms now need
out in due diligence to make sure we buy This sort of marketplace differentiation is specialized skills.
right,” says Steve Stubitz, operating partner now critical, Schiff adds, because deals are
at The Riverside Company. “It participates no longer all about dollars. They’re about Most private equity firms have reached
in portfolio monitoring. And—you hope you knowledge and a firm’s strategy for the the conclusion that the days of generating
don’t get to this part—when companies get companies it targets. “All of that’s important, returns via financial wizardry are done.
in a bit of trouble, it’s usually the operating and it’s dictated largely by guys at the table “Now you have to buy smart, you have to
partner that’s the quarterback in determin- who have been there before and can run right, you have to sell right—and you
ing what mix of resources we need to fix appeal to management teams,” Schiff says. need a certain type of professional for each
the company.” phase,” Stubitz says. “Depending on what
Dave Noonan, a national director of pri- the business needs, you may need some
Different firms structure their operating plat- vate equity consulting at RSM, notes that specialized skills to fix up a company. You
forms differently. MidOcean Partners uses his firm works with some private equity may have some of those skills in-house. You
“management affiliates” to perform the func- clients that have no operating background may have to go outside to get those skills.
tions outlined by Stubitz, an arrangement and rely completely on management teams And that’s where a seasoned operating
derived from the firm’s origin as a spinout to provide the execution, which can work in partner can really help drive returns.”
of Deutsche Bank. “It was difficult for us to certain industries and types of funds. “And
compete with the bank’s own sponsor then there’s a hybrid approach,” he says. With the amount of money in private equity

Privcap Reports • 2015 Operating Partners Yearbook / 28


“We work with a lot of firms that outsource

their operating team out of a very specific
vertical with specialists who bring expertise
to a very specific type of transaction.”
–Dave Noonan, RSM

these days, there is tremendous pressure on 4 The operational approach should love to have a whole portfolio of compa-
firms to put capital to work. They don’t have be suited to the portfolio company. nies like that, but that’s not reality,” Stubitz
the luxury of waiting for the perfect deal to says. “We have companies across the spec-
come knocking on their door. “You have to A lot of executives at companies acquired trum. We have some that execute very well
chase a lot of companies to find a few by a private equity firm have no idea what and have a light touch from the operations
needles in the haystack that’ll generate to expect. In these cases, the deal goes group. We have ones that struggle a bit
outsize returns, and some of those require more smoothly if the operations team is in- and need more intense focus from the oper-
some fixing up,” Stubitz says. volved at the outset, sitting in investment ating group.”
committee meetings, getting to know man-
It’s more important than ever to involve op- agement, and developing a rapport. 5 Management teams must take
erating partners in that chase, Schiff adds, ownership of the firm’s plan if the
because they’re the ones who truly know “That’s a differentiator in how we view the plan is to succeed.
an industry inside and out. “Management company and the space and build up a ba-
affiliates or operating partners give us a lot sis of knowledge,” Schiff says. “We have to Management buy-in is essential to the suc-
of conviction around paying a price in a be more than dollars-to-management. We cess of any deal. So how does a firm en-
competitive market,” he says. “They give us have to be their true partners. To do that, sure that it happens? “Whatever you come
the confidence to go ahead and buy that we have to share knowledge, and that often up with, it has to be their plan,” Stubitz
company with a plan to take it toward exe- comes from an operating partner or man- says. “You never want to get into the situ-
cution.” agement affiliate. For all the deals we’re ation where the management team feels,
able to complete, we feel the management ‘Well, that’s Riverside’s plan.’ When you
3 Operating partners are affiliate is added value. And the manage- get to that point—whether you want to ad-
increasingly involved in deals from ment team has to feel that as well.” mit it or not—you’re essentially running the
the outset. company.”
Companies new to the private equity pro-
A successful exit depends more than ever cess need to be assured that the acquiring He says Riverside has a set of tools, tem-
on a smart entrance. That’s why many firms firm will drive success, and involving oper- plates, and techniques to help management
now bring in operating partners during the ating partners early is important in doing teams develop a plan. But in terms of ob-
bidding process. Their industry knowledge that. At the other end of the continuum are jectives, outcomes, and milestones, the firm
is invaluable. those companies where the management leaves those up to management. “We may
team has been there and done that. insist on a certain reporting structure, but at
“We get involved in transactions earlier and the end of the day, we want to make sure
earlier,” says Noonan, “sometimes before “There are firms that are very laissez-faire that it’s their plan and they buy into it.”
the letter of intent is even completed, to help with regard to even having an operating
identify those areas where economies can partner interface with management.” Buy-in is not always easy, though. Schiff
be driven and value can be created. On the Noonan says. “And that can work out says MidOcean Partners regularly encoun-
other side, we try to come up with what the really well in cases where the management ters management teams that are skeptical.
risk components are in that transaction and team is well-heeled, may have been through “Remember, this is a management team
come up with a plan to help mitigate those a private equity transaction in the past, and that’s been left to execute without someone
risks to the point where it has an impact on understands the pace and complexity and looking over them, so we have to prove
the purchase price up front.” the endgame that private equity brings to our worth,” he says. “If we don’t do that,
the table.” there’s little incentive for them to ever come
This gives firms the opportunity to buy on board with us. We have to show why
smarter and with the understanding that But not every company runs perfectly to we’re going to add value to the process,
they have a way to take advantage of the plan, where the GP can check in every and they have to believe it.” ■
investment thesis as they have laid it out. quarter and then disappear again. “You’d

Privcap Reports • 2015 Operating Partners Yearbook / 29


LPs Vet
Two major investors discuss their approach to vetting
the operating platforms of GPs large and small

ust as it’s hard to find a general In-House vs. Hired Gun partners don’t get any carry to the extent
partner who doesn’t claim to be in the that the investment partners would receive,”
top quartile, it’s difficult to find a The most significant differentiator among Steers explains. “So, who is ultimately
private equity team that doesn’t claim operation platforms is where the operating responsible for the deal and how is it
to “add operating value” by pairing talent calls home. In other words, are they aligned with the investors?
operating partners—often former CEOs and partners within the private equity firm, or
senior executives with relevant industry are they brought in on a deal-by-deal basis “The easier model is, the guy who sources
experience—with their portfolio companies. as consultants and board members? the deal is responsible for managing it.
Tensions can arise if an operating partner
“There’s a lot of emphasis on [operating Neither Steers nor Vervoort expressed a says, ‘You sourced the deal with a strategy
platforms], especially at the larger end of preference for one model, but they did that is not working.’ The better model is
the market,” Maarten Vervoort of AlpInvest stress that each private equity firm needs where you have people on the operating
Partners told Privcap. “Including to assess what’s appropriate, given its size side involved pre-deal, helping to assess
plain-vanilla actions like leveraging is and investing style. If a firm considers a cer- the opportunity. Then there is a pre-agreed
something people already know, and it’s tain industry silo a “core capability,” then it 100-day plan that’s put into practice.”
so clearly already priced into the deal.” makes sense to employ operating partners
within the firm, says Vervoort, but only if it Vervoort also prefers to see the industry
Within the portfolio company, the operating has the proper scale. “If you only have one experts involved in sourcing, even if it’s just
partner’s role is typically straightforward: or two people on the operating team, the assessing the opportunities found by
They serve as an advisor to existing man- skills can get stale over time,” he says. others. “It sounds like a cliché, but the
agement or as a replacement until a new sourcer needs to be able to ask the right
leader is found. Within the private equity Steers adds, “Some of these skill sets can questions. For example, if you look at the
firm itself, the structure is far less defined. In get obsolete if the industry experts remain reporting that a GP will get from a potential
some cases, operating partners are within a private equity firm. Certain skills, portfolio company, it can be very financially
members of the firm, get a piece of the like supply chain management, can get driven, looking at sales, etc. But the best
carry, and return to the mother ship once used and replicated again and again with- GPs are operating driven, and they’ll want
their work is done; in others, they are hired in portfolio companies. But if you’re talking to know different sets of KPIs [key
guns who helicopter in and out of portfolio about a sector skill, people outside the firm performance indicators].”
companies on a deal-by-deal basis. might be more up to date on technologies
and practices.” The Question of Carry
Each arrangement has it pros and cons,
and limited partners need to understand Deal Sourcing The only “wrong” compensation structure
them clearly before committing capital. for operating partners is one that does not
To help guide the way, Privcap spoke with Another area the pair investigates is the properly align the partner to the success
Vervoort and Helen Steers of Pantheon, role the operating partner plays in deal or failure of the portfolio companies. The
two deep-pocketed LPs with extensive sourcing and, if they source a deal, the many GPs that AlpInvest and Pantheon
experience conducting due diligence on way they’re compensated for doing so. invest with pay their operating partners in
a GP’s capabilities. “What you quite often see is the operating different ways.

Privcap Reports • 2015 Operating Partners Yearbook / 30


Those with the scale to afford a large oper-

ating staff typically offer carry to operating

Peeling Back the Onion partners, Vervoort says. “But typically the
amount of carry is lower than the deal part-
ners usually receive.”
For Kevin Kester of Siguler Guff, due
diligence into the operating function means That’s not necessarily a problem, he adds,
separating fact from fiction as it may allow the GP to have a more dy-
namic operating function. “In order to make

rivate equity firms are like great R&D improvement and lean-manufacturing sure that the operating gene pool is fresh
sports teams: Sometimes one or improvement,” Kester says. “Whatever and healthy, you want to over time refresh
two star players carry the load; oth- they’re doing at a particular company to the pool of people,” he explains. “Carry is
er times a well-defined playbook add operating value, we want to under- so long-term it might not be appropriate.”
and collective grit leads to success. stand their take on it.”
“Look at Bill Belichick and the Patriots,” Siguler Guff also wants to see the hard
Kevin Kester, managing director at Siguler data backing up those claims. A focus among sophisticated LPs today is to
Guff, told Privcap. “They have a great look beyond the top-level performance
system, and they can plug people in Then he’ll follow up that conversation by history of a private equity team and actually
and out.” speaking directly with the CEOs of determine where that performance came
portfolio companies, because they will from. For firms that claim to significantly
Kester has spent a lot of time thinking often give an unvarnished account of improve the operations of their portfolio
about the impact of operating talent on the what’s really going on. It’s Kester’s job companies, a potential LP must try to
performance of private equity funds, to determine what’s true and what’s determine whether operating improvements
specifically funds that target small and wishful thinking. were the result of GP skills rather than
midmarket buyout opportunities. market momentum, the existing
“These CEOs are often not scripted,” he management team, or just plain luck.
Before placing a single dollar with a says. “If you specifically ask them where
private equity firm, Siguler Guff does they received help or how often they “It’s very difficult and gets to the heart of
extensive scouting and recruiting. The interact with the private equity fund, private equity due diligence,” Steers says.
process begins with interviews of fund you’re really going to uncover what’s truly “How do we determine that a private equity
managers and specific questions about the happening on a day-to-day basis. You may team turned a so-so company into a much
types of operational value they bring to determine that this is really a part-time better company? We look at realized deals,
their portfolio companies. operating partner who spends 85 percent look at profit attribution. We look at how
of his time doing other things. So you can much value was created through financial
“We’re looking for managers to be explicit quickly differentiate between what’s real leverage and how much came through prof-
about such things as cost-structure value-add and what’s window dressing.” ■ it improvement.”
improvement, sales and marketing
improvement, gross-margin improvement, Vervoort adds: “When we look at a real-
ized deal, we look at leverage, multiple ap-
preciation, and talk to management to get
their perspective for what the GP has done.
Clearly, success has many fathers. You can
“Clearly, success has many fathers. analyze it and talk to the management and
look at board minutes, etc. But really pin-
You can analyze it and talk to the pointing it to a causal relationship–that’s the
management and look at board hardest part.”

minutes, etc. But really pinpointing Ultimately, Pantheon and AlpInvest share
it to a causal relationship–that’s the a distinct advantage in vetting GP perfor-
mance. As active co-investors, they get di-
hardest part.” rect insight into how a GP approaches the
operating-improvement process. “Being a
–Maarten Vervoort, AlpInvest Partners
co-investor brings you really close to the
war stories,” says Steers. “It is an interest-
ing window into what’s really going on.” ■

Privcap Reports • 2015 Operating Partners Yearbook / 31


Privcap looks at the operating platforms
of ten private equity firms

KKR executives of high-profile firms in its Value valued between $50M and $250M.
Creation unit. Its investments are usually sector-specific,
The Captive Consultant Model in cash-flow-positive companies where it
The firm has $20B invested across multiple has identified opportunities to enhance
Private equity behemoth KKR makes its platforms and focuses on technology and productivity.
operating improvements through KKR tech-enabled industries and invests in
Capstone, its internal operating companies of varying sizes, including Arsenal has a six-person operating
consulting team. large-cap and middle-market companies. committee, nine operating partners, and
eight senior advisors.
A firm with $90.2B in assets under man- Silver Lake focuses on companies with
agement (AUM), best known for its leading market positions, strong The firm leverages operating resources in
majority equity investments in large-cap management teams, and proprietary varying roles depending on management
companies, focuses on retail, healthcare, core technologies. needs. The operating team has both
industrials, media and communications, general management and functional skill
financial services, and tech investments. The firm has 10 members in its Value sets and offers assistance in IT, human
Creation unit, which also has 16 advisors. capital, supply chain, six sigma, and
The firm employs more than 60 people in its The operating unit consists primarily of international expansion.
KKR Capstone team, with more than 20 in former tech executives of brand-name firms.
its senior advisor group, who often play
operational roles in its portfolio companies. The firm’s operating professionals are Blackstone
often involved in creation and introduction
KKR Capstone was created in 2000 and of new products and services. They also
The Cross-Portfolio
has professionals in North America, assist in deal sourcing and due diligence. Efficiency Model
Europe, and Asia. The team is organized
according to operational expertise, not Blackstone maximizes operating
industry acumen. Arsenal efficiencies across its portfolio with the aid
of its internal operating unit.
Capstone typically works with companies
The Flexible Operating Model
for a 12-to-24-month period. The group, which had $63B in private
Arsenal Capital Partners deploys its equity platforms (as of Sep. 30, 2013),
industry-savvy operating unit in different invests in a wide range of industries,
Silver Lake forms for different managers. The $1.675B depending on the fund and investment type.
firm specializes in healthcare and
The Tech Exec Model industrials investments. The publicly listed asset management firm
has four operating partners on its private
Silver Lake utilizes a handful of former tech The firm typically invests in companies equity team, 21 people in its portfolio

Privcap Reports • 2015 Operating Partners Yearbook / 32


operations group, two portfolio operating The firm’s investments span multiple improvements and is responsible for some
advisors, and 10 industry advisors. industries, but it frequently invests in of the most widely publicized turnarounds
distribution or service-related industries, in private equity history, including Kinko’s,
The Portfolio Operations Group, typically making large equity Hertz, and Lexmark.
Blackstone’s in-house operational consulting investments in companies with enterprise
unit, works across the entirety of Blackstone’s value between $1B and $15B.
portfolio. The CoreTrust Purchasing Group
manages $2B in annual spending across CD&R invests in market-leading companies
nearly 60 portfolio companies. that are underperforming, targeting The Operation-by-Affiliation
enterprises with large customer and supplier Model
The operations staff focuses on revenue bases and diverse revenue streams.
realization, operations, services and Cerberus keeps a fleet of more than 100
infrastructure, purchasing and cross-selling, The firm has more than 10 operating experts on hand at its affiliated operational
leadership development, and healthcare. partners and seven operating advisors. unit. The firm, which has a total of $25B
(including non-private equity investment
CD&R’s operating partners are typically vehicles), invests in a wide variety of
Clayton, Dubilier installed as chairmen of the board at sectors, including manufacturing,
portfolio companies. Operating partners government services, transportation, and
& Rice are typically at the helm of one to three financial services. The sizes of the
The Original “Operators as portfolio companies at a time. ventures it invests in also vary, but are
Partners” Model typically large-scale investments in
More than one-third of company profits go large-cap companies.
CD&R’s operating partners have been the to the operating team. The firm prides
heart of the $17B firm since 1978. itself on making countercyclical operational In addition to its distressed, real estate, and

Privcap Reports • 2015 Operating Partners Yearbook / 33


commercial lending platforms, Cerberus Sun Capital typically makes control equity Since 2000, 90 percent of Welsh Carson’s
makes control and minority investments in investments and leveraged buyouts in investment returns have been generated by
its private equity vehicle. middle-market companies. The firm often operational growth. The firm develops
targets enterprises undergoing corporate value maximization plans for newly
The Cerberus Operations and Advisory divestitures or operational challenges. acquired companies.
Company has more than 100 professionals.
Roughly half of the operating team is currently It has more than 35 professionals in
employed by portfolio companies. The team its operating team, 10 of whom are The Riverside Company
also assists in sourcing deal opportunities. managing directors.
The “Growing Small”
The firm’s operating imperative for Operational Model
TPG portfolio companies stresses liquidity and
performance benchmarking. Riverside employs industry expertise
The Turnaround to help small companies grow over the
Consulting Model Its team includes geography-specific long term.
functional specialists and former industry
TPG, which has $54.5B in AUM across executives. The firm, which has $3.5B in AUM, invests
multiple platforms, invests in a broad range in a wide range of sectors, in companies
of sectors and company sizes, depending with enterprise value of less than $250M.
on the fund. Welsh, Carson,
Its operational team, which comprises four
TPG executes global public and private Anderson & Stowe managing and senior operating partners,
investments through leveraged buyouts, The Blended Industry/ 10 operating partners, nine operating
recapitalizations, spinouts, growth invest- Functional Model executives, and 10 senior advisors, focuses
ments, joint ventures, and restructurings. on organic growth and add-on strategies.
Welsh, Carson, Anderson & Stowe
It has more than 60 in-house operations utilizes both industry executives and The operating team is instrumental in
professionals. At TPG, operation partners functional specialists in its operational unit. Riverside’s focus on organic earnings
are full partners in all profits. Since its inception, the firm has organized growth as the most important factor in
15 funds with total capital of $20B, value creation.
Operating team members typically have a investing in information and business
blend of direct management and consulting services as well as healthcare, with no Operating professionals range in
experience. standard deal size. background from Fortune 500 executives
to small-company founders.
The operations team is fully integrated with Welsh Carson typically focuses on
the investment team. Operating assets also operational improvements and partnering The firm created a “Riverside Toolkit” that
include a field operations advisors group with talented management teams. helps small companies with marketing,
focused on cross-portfolio business functions. pricing, and lean manufacturing. ■
It has six generalist professionals, eight
functional specialists, five senior industry
Sun Capital Partners executives, and four affiliated industry experts.
The in-house operational team is called the
The South Florida Blend
Resources Group. It comprises both
functional specialists with cross-portfolio
Sun Capital mixes former industry execu- expertise (such as procurement) and
tives with business function specialists. The former industry chief executives. It maintains
firm, which has $10B in AUM, invests in a a group of affiliated former chief executives
variety of industries, typically in companies who also assist with deal sourcing and
ranging from $50M to $3B in revenue. due diligence.

Privcap Reports • 2015 Operating Partners Yearbook / 34


as a whole, the culture of the firm and its

Everyone Says They

long-term relationships.

But there is an equally compelling argument

Have the Best

for the operating advisor/hired-gun model.
A former corporate executive embedded
in a private equity firm for years, scanning

Operating Model
deal flow and jumping into portfolio com-
panies, may become stale, especially in
fast-morphing industries such as technology.
Better to catch a mid-career superstar for a
value-add project and then release him or
But the only thing that really matters about a private equity her into the field.
firm’s operating structure is that it delivers results, says
An authoritative study comparing the
Privcap CEO and Co-founder David Snow financial results of one operating
model over another. More importantly,
experience has shown investors that
spectacular success and soul-crushing
failure can result from all of these models.

What matters most is this: Whatever way

you try to extract value from a portfolio
company, are you good at it? Are the right
people being deployed in the right way? It
is possible to create what appears to be a
winning marriage between operating and
transactional talent with a flawed incentive

On the flip side, a firm that relies on

accomplished, super-incentivized hired
guns may have a habit of buying hopeless
companies for too much, at the wrong time.
Such a portfolio company will fail to thrive,
even in the hands of an operating superstar.

The head of a major endowment private

equity program, well known for his
outspokenness and cynicism, once told me
that he scoffs at any GP who claims to
“add operating value.” Invariably, this LP
says, he would find wipeouts and
underperformers in these GPs’ track records
and ask, “The special things you did to the
winning deals, why didn’t you do them to
these other deals?”

t is far from clear which model for incor- program, whose economic incentives and Perhaps an unfair challenge, but the
porating operating talent into private eq- personal pride of ownership penetrate the dismissive attitude isn’t far from the
uity works best. entire firm, will be willing and able to ex- well-resourced limited partners’ current state
ert his or her full energies into optimizing a of mind. Showing them an operating
The logic behind the full-partner operating deal. An operating partner only assigned platform that is supposed to work is very
executive model is this: Only a partner to particular deals, or brought in as a hired different from presenting an operating
who is fully integrated into an investment gun, will fail to give a damn about the fund platform that works. ■

Privcap Reports • 2015 Operating Partners Yearbook / 35


A roundup of 2014 news about operating professionals in private equity

Altamont Hires Legg Mason $50M. The firm targets companies with included Berkshire Hathaway and Brazilian
Exec enterprise values of up to $250M. private equity firm 3G Capital Partners. At
Advent, Johnson will focus on consumer
San Francisco firm Altamont Capital
packaged goods and food businesses,
Partners hired Dave Odenath as an
CD&R Operating Partner the Boston-based firm said in a statement.
operating partner to focus on investment
Advent has some $32B in assets under
opportunities in the financial services Chairs Helicopter Co. management and substantial investment
sector. Odenath was a senior executive vice Clayton, Dubilier & Rice operating practices in the emerging markets, including
president and head of Americas at Legg partner John Krenicki became the chair- Eastern Europe and Latin America.
Mason, the asset management and mutual man of CHC Group, the largest operator
fund company. Keoni Schwarz, managing of helicopters for the offshore oil and gas
director at Altamont, said Odenath would industry, following a major investment com-
help the firm pursue a “distribution-centered mitment from the New York private equity
Advent Names PPG Exec as
strategy” within financial services. Altamont firm. Krenicki is the former CEO of GE Operating Partner
has more than $1B in assets under manage- Energy. The Clayton Dubilier commitment Advent International appointed
ment. to invest as much as $600M in CHC came J. Rich Alexander as an operating
after the helicopter company failed to raise partner. Alexander was previously a senior
as much as expected in a January IPO. The executive at PPG Industries, where he
Castanea Promotes deal gave the private equity firm the right to oversaw the company’s global architectural
appoint a chairman as well as three board coatings, fiberglass, and flat glass business-
E-Commerce Guru Chu members. Energy specialist private equity es. At Advent, Alexander will work with
Boston-area firm Castanea Partners firm First Reserve Corp. continues to own a the chemicals team to source investment
promoted Julian Chu to operating part- 29 percent stake in the company. opportunities in the chemicals and materials
ner. Chu, who joined Castanea in 2012, sector. In a statement, Advent managing
is an e-commerce and digital marketing director Ronald Ayles said that Alexander’s
specialist. In a statement, Castanea part- “formal addition to our operating partner
ner Robert Smith said: “Julian’s industry Advent Names Heinz program strengthens our robust internation-
and technological insights are vital to Chairman as Operating al team.”
successfully supporting our investment port- Partner
folio, and to the process of evaluating new
Global private equity giant Advent
investment opportunities.” Before joining
International named Bill Johnson as
the firm, Chu was head of commerce for Industrials GP Names
operating partner. Johnson is the former
PUMA North America, the sport lifestyle
chairman, CEO, and president of H.J.
Operating Partner
brand. Castanea is currently investing from Minneapolis-based Spell Capital ap-
Heinz, the consumer foods company. Heinz
its third private equity fund, which raised pointed Kip Colwell as operating partner.
was taken private last year by a group that


Privcap Reports • 2015 Operating Partners Yearbook / 36


Colwell was previously CEO of Advanced followed the resignation of Garry McGuire the security and defense industries. “John is
Web, a label and flexible packaging cov- from leadership of the company. Michelson a thought leader within the government con-
erer for the medical device and consumer was with Sterling from 2009 to 2012. The tracting industry and a deeply experienced
goods industries. At Spell, Colwell will focus Baltimore-based firm has $5B in assets executive. He has executed the same growth
on strategy and operational improvements under management. strategies and led businesses through the
at the portfolio company level. In a state- same challenges that our companies face
ment, Colwell said: “I’ve been involved for today,” said Dave Stienes, partner at LLR, in
a number of years [with Spell] as both an a statement.
investor and board of advisor member in all Z Capital Hires “Operational
of the previous funds, and I think this team
Efficiencies” Expert
is second to none.” Spell invests in industrial J.F. Lehman Appoints
and manufacturing businesses and also has Turnaround specialist Z Capital Part-
ners hired Timothy Clayton as manag-
defense operator
a mezzanine debt investment division.
ing director and operating partner. Prior to New York private equity firm J.F. Lehman,
Z Capital, Clayton was CFO of Tile Shop led by a former secretary of the navy,
Holdings, a specialty retailer and portfolio announced the addition of Thomas
GenNx360 Names Army Dyer to the firm’s operating executive
company of private equity firm J.W. Childs
Vet as Operating Partner Associates. He was also founder and board. Dyer was co-chairman of law firm
Otis Spencer was named operating managing principal of Emerging Capital, Blank Rome. He also served in the U.S.
partner at GenNx360 Capital Part- a management consulting firm. Z Capital Navy. “Mike brings not only an excep-
ners. Spencer was formerly manufacturing has $1.7B of committed capital and offic- tional reputation for business acumen and
strategy and operations advisor at WBS es in Lake Forest, Illinois, and New York leadership to our firm, but also a deep
Financial, where he advised on effectiveness City. The firm pursues an “opportunistic, knowledge of the maritime industry and
of manufacturing, quality control, planning, value-oriented approach in private equity government contracting—which are critical
and engineering. At GenNx360, Otis will that includes making control investments in to our investment strategy,” said Dr. John F.
focus on sourcing new platform investment middle-market companies that may require Lehman, the firm’s chairman.
opportunities, conducting strategic and growth capital, turnaround, restructuring
operational analysis, and business model or other special situations,” according to a
sustainability. In a statement, GenNx360 statement. KKR Capstone Names
founding and managing partner Lloyd
Trotter said: “Otis’ experience in our core
China MD
investment segments is highly complementary KKR Capstone, a firm that works
to our team.” Spencer began his career in Venture Veteran Names with private equity firm KKR on portfolio
the U.S. Army. He was director of adminis- Operating Partner company operations, named Matthew
tration and operations in Iraq and Kuwait Draper Fisher Jurvetson, fresh from Chang as managing director in China.
and was awarded the Bronze Star Medal raising a $325M Fund Xi, named Heidi Prior to joining KKR Capstone, Chang was
for leadership during wartime. Roizen as an operating partner. Roizen an executive at Roland Berger Strategy
was formerly a managing director with Consultants, based in Shanghai. Accord-
Mobius Venture Capital. ing to a statement, KKR Capstone “works
in partnership with KKR’s private equity
Sterling Operator Becomes investment professionals and portfolio
Interim President of RMG company management teams to help
LLR Partners Hires State maximize businesses’ potential and create
Robert Michelson, an operating partner
at Sterling Partners, was named interim
Dept. Official sustainable improvements to generate
president and CEO of RMG Networks Middle-market private equity firm LLR growth, increase efficiency, and enhance
Holding Corp., a publicly traded video Partners has hired former assistant sec- capital allocations.”​■
advertising network. At Sterling, Michelson retary of state John Hillen as operating
“served as lead director, helping companies partner. Hillen was most recently president
enhance their operational effectiveness and and CEO of Sotera Defense Solutions,
realize their full potential,” according to which completed an IPO in 2009. At LLR,
a press release. Michelson’s appointment Hillen will pursue investment opportunities in

Privcap Reports • 2015 Operating Partners Yearbook / 37


How to
Choose an
Mauro Bonugli, RSM
Technology sector veteran Mauro Bonugli, who joined RSM in 2014 to head the firm’s East Coast
private equity consulting practice, tells Privcap about key trends in the private equity operations space and
what firms should look for when hiring a third-party team to help execute their strategies

Privcap: Has there been an cases, operating partners are driving the that fits within the five-to-seven-year life cycle
increased focus on operations in strategic discussion with management teams of investments.
the private equity sector? And why? and developing the key value-added
initiatives. They are then hiring third-party What is McGladrey’s area of
Bonugli: Of course. There are significant providers to execute their plan. Operating focus when looking for operational
opportunities for private equity funds to partners are looking for a third-party improvements?
increase their returns through operational provider with service focus and depth, a
improvements. That has been an increasing strong team that focuses on a very specific We execute many technology-driven
focus for private equity funds for the past 10 area, and a depth of knowledge that will initiatives. Most of those are coupled with
to 15 years. In the ’80s and ’90s, returns help execute their strategy. It’s very a set of performance improvement metrics,
were traditionally drivenby financial different from hiring a management driven by top-line or bottom-line
engineering and leverage. With changes in consulting company, because they are first improvements and a technology component
capital markets, post–financial crisis, doing the strategic decision-making process, that will enable that initiative to take place.
operational improvements have become a key then coming to a service provider. For example, increasing the throughput of
component in the investment thesis. a distribution center by enabling a series of
What should private equity process automation through the deployment
What are the biggest trends you operating teams look for when they of a warehouse management system, rather
see in the area of private equity hire a third-party group to help than having to invest in a new warehouse.
operations? execute their strategy?
RSM has about 1,500 consultants overall.
I continue to see more and more private Besides the depth of understanding and a Our private equity consulting team is
equity firms building out their operating proven track record on specific projects, the structured in a way to most effectively
capabilities. With LPs becoming increasingly third component is an understanding and leverage our diverse set of capabilities and
interested in understanding how private experience in working with private equity deliver a product that optimizes the most
equity firms apply their operating resources funds. There is a big difference between value for our clients. We have dedicated
to maximize fund performance, many working with a private equity portfolio senior complex delivery leaders that focus
operating partners are discovering new ways company and a non-private equity-owned solely on private equity engagements, and
to improve returns through operational company. The private equity life cycle is not we also have a dedicated pre-investment
improvement. This includes building close long enough for a multi-year business due diligence team. In addition, our practice
relationships with third-party service transformation program. It has to be specific leaders are constantly expanding our
providers to augment their teams. In many initiatives with a quick time-to-value program consulting capabilities to better serve private
equity firms. ■
Mauro Bonugli is a director, private equity consulting, at RSM. He has more than 15 years of experience in developing and executing technology-driven
growth and business improvement strategies. He was previously an advisor at Warburg Pincus and has worked at the Resources Group and Credit Suisse.

Privcap Reports • 2015 Operating Partners Yearbook / 38

RSM meets the needs of private equity firms and their portfolio companies with integrated transaction advisory, tax, audit, and consulting
services. Our clients benefit from our single-point-of-coordination service model and expert teams that operate as strategic partners at every
point in the private equity life cycle.

Our expertise in privately held first-time-sold companies offers a unique perspective on how these companies operate and their common
issues. Private equity firms investing in the middle market turn to us because of this deep expertise and an industry specialization that aligns
with many firms’ portfolios.

RSM LLP is the leading U.S. provider of assurance, tax, and consulting services focused on the middle market, with more than 7,000
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