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May 14, 2007

Do buyout firms need operating partners?

Knowledge@Wharton has an interesting article on whether buyout firms hiring operating partners "with experience running plants and facilities, and rolodexes full of industry contacts" will boost their higher returns.

A "pro" view:
Peter Clare, managing director of The Carlyle Group and another conference panelist, says that with increased competition for deals bidding up valuations, operational improvements are more important than ever for companies hoping to continue to deliver above average returns for their private equity investors.

"We've developed both in-house and loose networks of operations executives who will participate in due diligence and may end up running a company or serving as an executive chairman," Clare says. "Industry expertise helps us set the plan accurately and focuses [us] on what is achievable in the shortest amount of time possible given the competitiveness of our business today. It is fundamental to what we all do. It's a big reason for our ability to generate returns that are above overall equity markets."

An "anti" view:
Kevin Landry, chief executive of TA Associates, is not a believer in operating partners. "We don't have [them]," he says. "We expect everyone here to be a complete player." Partners at TA follow the more traditional private equity design in which accountability for results lies with the partners who find the deal, conduct the due diligence, structure the transaction and serve on the board. "If a company becomes a problem, then it's his or her problem. We might bring in some people [from] industry who can be helpful on the board, and maybe even active board members, but we're not going to have people here that we would call operating partners."

Landry says that if a target company's management needs so much help that a financial sponsor needs to bring in an operating partner, he steers clear of that company. "We're trying to invest in good companies. If a company needs an operating partner, then there's something wrong."

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports.