Finding the right time to hire a private equity portfolio operations team

20 years ago, leveraging and deleveraging debt was a successful tactic for growing private equity value. Today, most of this value comes from making operational improvements to portfolio companies.

Any private equity firm would agree that having the right talent to steer the ship within a portfolio company is critical to realizing an investment thesis. However, many are starting to want a steady bench of operators at the fund level who float into challenging situations as needed. These roles can take shape in several ways, but we’ve seen a rise in formal portfolio operations teams.

For private equity firms interested in building a new portfolio operations team as a potential value driver, common questions are when and how to start. Here are a few considerations:

Before making your first hire, determine what types of challenges your portfolio companies are facing.

Usually, a private equity firm isn’t starting a portfolio operations team on its first or second fund. At this point, the deal team is still driving most, if not all, of value creation while ironing out its overall investment playbook.

Once the deal team is on the second or third fund and the deal pipeline is becoming more robust, capacity becomes an issue. If this is true for your team, it can be advantageous to silo portfolio value creation into its own function. But before doing this, know exactly what problems this function will address among portfolio companies.

For example, when private equity investors target the lower middle market, the companies they purchase need more institutionalization and may benefit from activities like hiring a true CFO, standardizing commission plans or changing suppliers.

Targets in the upper middle market are much further along in their maturity, which means they face an entirely different set of challenges, such as installing a new company-wide ERP system, integrating Lean Six Sigma principles across the manufacturing footprint or consolidating distribution warehouses.

The challenges you need to solve should directly align with the skills and experiences of the talent you hire. To do this effectively, understand the most common archetypes for portfolio operations hires.

Know your ideal background for portfolio operations hires.

On the investment side of the house, private equity firms target former investment bankers. On the portfolio operations side of the house, the landscape is much broader, but there are three common archetypes:

Ex-CxO Advisors: Seasoned executives with multiple successful exits under their belt, usually serving in an advisor capacity. In some instances, these leaders will work part time in multiple portfolio operations teams, hence the “advisor” title.

Functional Expert: Deeply specialized executives with a wealth of knowledge in one area. Common focuses include go-to-market, finance (office of the CFO), supply chain, digital/AI, procurement, pricing, talent acquisition, etc.

Generalist: The last and most common archetype is a true generalist brought in to oversee a range of complex value creation strategies. These roles are almost always filled by former management consultants. Their experience working across industries and solving high-impact challenges positions them to add immediate value in portfolio operations.

The most common distinction in portfolio operations hiring is whether to seek functional experts or generalists. Functional experts join portfolio operations teams to solve niche, recurring issues they’re uniquely qualified to handle. Generalists apply the same value creation playbook in different environments while staying agile in the face of new challenges. Some firms will hire a mix of all these profiles, while some will focus on just one. Who you hire depends on the problems you’re facing and how you plan to deploy your team.

The bottom line:

You should build a portfolio operations team when three things are true: your deal team is too busy to oversee portfolio value creation, you have a solid understanding of common issues faced in your portfolio companies and you know the exact profiles that will best serve your value creation needs.

In today’s private equity landscape, true value creation hinges less on financial engineering and more on hands-on operational improvements. While past strategies relied on leveraging and deleveraging debt, modern firms increasingly turn to portfolio operations teams to drive transformation within portfolio companies.

To learn more about portfolio operations recruiting, contact Clifton Vaughan at (336) 217-9133 or clifton.vaughan@charlesaris.com.