Are there any private equity associate roles where you can gain genuine "operational" experience? Or is this all B.S.?
Private equity funds like making the claim that they are "operationally focused" and that they do not solely rely on financial engineering to generate returns. Much like, "long term investing," a focus on "turning-around" or "growing a business" appears to have almost a moral quality to it among investors and it is often in the marketing language used to persuade banking analysts to join private equity firms.
Much of the writing on WSO has sought to dispel this illusion. From what I understand, most associate roles are banking 2.0 and you will not be a master of the universe telling an experienced executive how better to do something s/he has done for decades. That being said, most is not all. In my experience, at least some private equity firms appear to actually have a genuine operational focus.
My default assumption is that anyone that claims to have this focus is lying / spinning / marketing, unless I have hard evidence otherwise. I tend to believe firms when they (a) hire (i) ex-consultants (ii) people from industry and (b) focus on companies that cannot be easily levered like (i) distressed companies and (ii) early-stage companies. This is provided that something else doesn't take up all your time so you don't end up doing any operational work, like sourcing, such as at TA / Summit (which would both otherwise meet these criteria). It could be possible to check on CapIQ to see the average leverage these firms put on to see whether they genuinely were using moderate leverage and hence had to be generating "alpha" through operational excellence. I would also assume that an industry focus is necessary to have genuine operational focus (since operational excellence requires industry expertise). Interestingly, I think impact investing could be an area where you could get this experience (there's less money there so I would guess they would have less talent; if you're really clever you could probably actually help your portfolio companies; apologies if I seem arrogant here, but my general impression is that people that start socially responsible ventures are often clueless but well-intentioned so I actually think they may benefit from the advice of a talented young person).
Based on a very rough understanding of the facts, I would assume that funds that could possibly have a genuine operational experience would be (a) upper-middle market funds that hire a lot of consultants (e.g., Vista, Bain, Berkshire, Golden Gate, Advent), (b) growth equity funds that avoid a sourcing model (e.g., General Atlantic, Insight Venture Partners), (c) distressed private equity funds that cannot use more leverage than already exists on their portfolio companies (e.g., WL Ross) and (d) impact funds (e.g., Leapfrog). I am probably wrong because I think most funds really just use financial engineering and dealmaking (the list is surely narrower than the examples I just mentioned), but I want to hear what other people think!
bump - any thoughts?
bump - anyone have a more comprehensive list of these funds?
In my experience, most established firms of this sort have separate investment and operational teams especially if they are using it as a marketing angle for fund raising.
I would definitely agree with that. Larger funds definitely tend to have separate investment and operational teams (think KKR Capstone), which is something they often use for fund raising as well as to appeal to management teams of firms which they want to buy.
That said, smaller funds might have an operational partner, who often has a restructuring background, and you'd get staffed on operation-focused projects depending on how your portfolio companies are developing. I have worked at a PE fund before where they had the latter structure. So there was a chance that you ended up doing a lot of operational tasks as an analyst/associate in that PE fund. I know one of the analysts at one point had to make a list of actions to restructure and help the business focus on its core expertise again, including making a list of people to fire.
I'd say that some of it is marketing and some of it is true, but also that it's a little bit in the eye of the beholder. I've worked at two middle market PE firms and both claimed to be "operationally focused" or "operationally intensive", though neither were special sits or distressed/turnaround funds (neither had internal consulting/ops groups either like KKR Capstone).
On the marketing side, imagine any fund saying "oh, we're just financial buyers, we don't do anything with our companies" - not a very good pitch. LPs want to believe/see that there is some process, some science to how you work with companies. They have a hard job committing to blind pools, and seeing that fund at least markets a "process" to adding value (rather than just pure beta) is one way they can rationalize investing in PE funds. Truth be told, I'm not sure how many funds left out there that invest in a company and say "send me the financials at the end of the month, see you at the board meeting."
On the truthier side, it also comes down to what you think is "operational" - does that mean rearranging factory/warehouse layouts and instituting Lean/5S systems? Does it mean hiring/firing management teams? Helping with budgeting/forecasting? General involvement with decision-making about where to open new locations or which acquisitions to do or which new products to invest in? Assisting with pricing optimization? Hiring consultants to come in and revamp sourcing/finance/IT/sales processes? I have a slightly different profile than your typical PE guy, but I have no special expertise and I've been involved in some manner of all of the above (though my sample size is obviously limited).
There are various levels of operational involvement that PE firms can have that don't involve showing up to the factory with a clipboard and a hard hat, especially when it comes to analytical decision-making. Some firms may be more involved than others, which is partially dictated by the fund size, strategy and pace of deployment (do they have 12-14 platforms per fund or 15-20), but almost all are going to be involved in decisions that affect operations to some extent.
What questions can I ask to weed out the b.s. here and find the funds in the interview process that actually help operationally? Do you have a list of companies that you respect in this regard?
I don't have a list of companies that I truly know are operationally intensive, since so much of the truth sits behind the veil of marketing mumbo jumbo. And mind you that "operational improvements" are going to be different at a TMT fund vs an industrial fund vs consumer/retail vs whatever else. Operational improvement will also be different at a distressed/turnaround fund versus a more growthy type of investor. Either way, a few questions I might ask are:
Anyways, like I said, a lot of the "truth" behind that question is going to be colored by the investment strategy and sectors they invest in. Having a good handle on that and probing a bit through the above questions should get you a decent idea.
Met a PE fund the other day that said they send out associates to live at the portco their first year, FWIW
I have a little bit of a different perspective......
I've never worked in PE and don't pretend to be an expert in their structures or operations. However, I have worked in industrial companies that have bought and sold from PE and leaders who have worked for PE firms as President of their Companies.
The real Operators that work in the companies generally believe that PE firms add little value operationally. In the experiences I've seen, no one from a PE firm is ever going to come in and fix a supply chain problem, optimize a plant, help with cost studies, etc... However, they will hold reviews that can help pinpoint areas where the Company is struggling or ask engaging questions. My old President was pretty fond of PE guys and he said that the reviews with the leaders of PE were always good for discussing ideas and being challenged, but then (in his experience) the execution was all on him.
Unless you're in some very niche role, I'd assume that you'd discuss operational issues in a traditional PE associate role, but you'd be very unlikely to really work on them. By the way, that isn't that unique, even within operating companies, there aren't that many people that truly get in and fix operational problems.
Your title is implicitly biased against chimeras.
I'm an Associate at a smallish operationally focused PE fund so I'll give my 2 cents. We're a small firm overall, a few investment partners, an operating partner, a few in house ops guys, and a few investing associates so we're about ~10 overall. I don't have a ton of context because I haven't worked at any other PE firms, but I will say that our firm tends to be more operationally focused than others I have come across. The ops team and investing team work very closely, even when diligence companies as we fully intend to be hands on in actively growing the business.
With all that being said, when I joined a little more than a year ago, I was told the role was very much going to be a hybrid role between operations and the traditional PE associate type of role. Fast forward a year (and after a few more hires to the ops team, only had the partner when I joined) and I find myself doing very little by ways of operations. I have some board involvement with a few companies but mainly as an observer and aside from a few ad hoc projects at the beginning of my tenure, I really find myself very heavily focused on sourcing, diligence, and running the deal process. I don't necessarily mind the change, but I'm definitely not flexing my ops skills as much as my finance/deal making ones. I also don't really see too much of a path for me to jump over to a portco as I doubt anyone would trust me to take up a leadership position with only a few years of experience. Despite my background not being purely traditional banking, I just don't have enough ops experience to really make an impact on sales, marketing, or product which tend to be the larger ops roles available. I'd have to either do something on the finance side or perhaps just a more generalist business operations type role, but even those would be tough.
I think when it comes down to it, there is only so much time in the day and as an associate the deal aspect is almost always going to be prioritized over helping out the portcos, especially if the firm has a dedicated ops team. It's also very tough to take an involved role in a portco if you know that a deal could come down the pipe which would occupy most of your time and immediately take precedence.
I think the only way you'd really get operating experience as an Associate is if you join a really tiny firm where the firm is only managing a few portcos and you can get in and help. Any firm that is decently sized with either have an operating team or will be big enough that they will hire outsiders to help run the companies.
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