• Oct 21, 24
• Shawn Cole
• Private Equity & Investors
• 0 comment

The Evolving Role of Operating Partners: Insights from Cowen Partners’ Private Equity Recruiting in Q3 2024

In our extensive work with private equity firms throughout 2024, Cowen Partners has observed a clear divide in how large-cap and mid-market firms utilize operating partners. While large-cap firms are increasingly moving away from relying on operating partners, mid-market firms are doubling down on their value for driving operational improvements. This evolving dynamic highlights the distinct strategies in value creation and operational transformation across the private equity landscape. Here’s a closer look at how these trends are shaping the role of operating partners today.

Large-Cap PE Moving Away from Operating Partners

• Focus on Scale and Financial Engineering: Large-cap private equity firms are increasingly relying on financial engineering, strategic M&A, and capital structure optimization to drive value creation. With larger, more institutionalized portfolios, operational transformation is often viewed as secondary to financial maneuvering, reducing the need for full-time operating partners.
• Shorter Hold Periods: Large-cap firms tend to focus on quicker exits, where the emphasis is on cost efficiencies and strategic bolt-ons rather than long-term operational improvements. This makes operational transformation less of a priority and limits the role of operating partners in these firms.
• Cost Considerations: Hiring and retaining top-tier operating partners can be costly. Large-cap firms, with access to a wide array of external advisors, often prefer a more flexible model that allows them to bring in operational expertise on a deal-by-deal basis, minimizing the investment in full-time roles.
• External Expertise: The larger firms have access to global consulting and advisory services, which enables them to tap into specialized knowledge as needed without the commitment of maintaining operating partners on staff.
• Mature Portfolio Companies: The businesses that large-cap PE targets tend to be more mature, with experienced management teams and well-established processes. This reduces the need for operational intervention, leading to a lesser reliance on operating partners.

Mid-Market PE Going All-In on Operating Partners

• Operational Improvements as a Key Driver of Value: For mid-market private equity, operational improvements are often a primary source of value creation. Whether it’s upgrading technology, optimizing supply chains, or enhancing sales strategies, operating partners are integral to these efforts.
• Differentiation in a Competitive Market: In the mid-market space, operating partners are a strategic differentiator. Firms that demonstrate a strong operational capability signal to investors and sellers that they can deliver more than just financial engineering—they can drive genuine growth through hands-on improvements.
• Addressing Talent Gaps in Portfolio Companies: Many mid-market companies have leaner management teams and may lack the skills required to execute transformational changes. Operating partners fill these gaps, working alongside leadership to implement necessary strategies and drive growth.
• Longer Hold Periods: With longer investment horizons, mid-market firms have the time to allow operating partners to generate meaningful, sustainable improvements. The commitment to operational leadership is justified by the extended period in which these improvements can bear fruit.
• Direct, Hands-On Engagement: Mid-market firms benefit from the direct involvement of operating partners. These executives often have more regular and close interactions with portfolio companies, providing hands-on support that can lead to significant performance improvements.

Navigating the Future of Operating Partners

Cowen Partners’ third-quarter experience in 2024 reveals that operating partners continue to play a crucial role in private equity—but their importance is felt more acutely in the mid-market space, where operational improvements are often the key to unlocking value. As private equity firms navigate the complexities of today’s market, understanding when and how to deploy operating partners remains critical to success.

At Cowen Partners, we specialize in connecting private equity firms with the right leadership, including operating partners who can deliver transformative results. Whether you’re looking to enhance your portfolio companies or refine your operational strategy, our expertise can help you find the talent you need.