Operating Partners: How PE Firms Create Value

Twenty years ago, private equity returns came primarily from financial engineering: leverage, debt paydown, and multiple expansion. Operational improvement was secondary — useful when it happened, but not the core thesis.

Today, that has flipped. Top PE firms generate the majority of their returns from operational improvement. Multiple expansion is unreliable (multiples have compressed across most industries). Leverage has limits (debt costs more, lender discipline tightens). Operational value creation is the differentiator.

This shift has produced the operating partner — the PE firm's industry expert, embedded in or alongside portfolio companies, driving the value creation plan. This article covers what operating partners do, how PE firms structure them, the value creation playbook, the evidence on whether operational PE actually works, and how to evaluate a PE firm's operational capability.

Who operating partners are

Operating partners are senior professionals with deep operational experience — typically former CEOs, CFOs, COOs, or division presidents of operating companies. They join PE firms (as full-time employees, senior advisors, or operating partners on retainer) to assist portfolio companies during the holding period.

The profile of a typical operating partner:

• 20–30 years of operating experience in a specific industry or function.
• Track record of running businesses through growth, transformation, or both.
• Network of executives, customers, suppliers, and advisors in their industry.
• Willingness to work hands-on at portfolio companies, not just provide advice from afar.

Operating partners are recruited from many sources: former Fortune 500 executives, divisional leaders, McKinsey/Bain/BCG senior partners, public company CEOs. The best PE firms have invested heavily in building rosters of operating partners — Vista Equity Partners has hundreds; KKR Capstone has 100+; The Carlyle Group has dozens.

How PE firms structure operating partner roles

Three common structures:

Structure 1 — Internal operating team. The PE firm employs operating partners full-time. These individuals work across multiple portfolio companies, often specializing by industry or function. Examples: Bain Capital, Vista Equity, Blackstone.

Structure 2 — Network of operating partners. The PE firm maintains a network of senior advisors and operating partners who engage on specific deals. May be on retainer or paid per engagement. Examples: KKR Capstone, Apollo, Advent.

Structure 3 — Hybrid model. Combination of full-time operating partners and external advisors. Most major firms use this model.

The structure varies by firm size and strategy. Smaller and mid-market firms often use the network model; large funds with many portfolio companies have built internal operating teams.

What operating partners actually do

The work varies by portfolio company stage and needs. Common engagements:

Strategic planning and execution. Working with CEO and senior management to develop and execute a 3–5 year strategic plan. Often this is the core of the value creation plan.

Operational improvement. Cost reduction (procurement, organizational redesign, automation), pricing optimization, revenue growth initiatives, salesforce productivity.

Talent management. CEO succession planning, executive recruiting (especially CFO, CRO, CIO roles), board composition.

M&A and integration. Acquiring add-on companies, integrating them, capturing synergies.

Capital allocation. Working with management on CapEx prioritization, working capital optimization, dividend recapitalizations.

Crisis intervention. When a portfolio company underperforms, operating partners often step in to manage through the crisis.

Exit preparation. Positioning the company for sale — improving margins, building out missing functions (CFO, IR, compliance), preparing diligence materials.

A typical operating partner engagement: 1–3 days per week at a specific portfolio company, sustained over 12–24 months. Some operating partners interim-CEO when needed.

The value creation playbook

The standard PE value creation playbook, applied across most deals:

Lever 1 — Pricing optimization.

Most companies, especially those acquired by PE firms, have underpriced their products. Pricing optimization — segmented pricing, value-based pricing, pricing structure changes — typically delivers 1–3 percentage points of EBITDA margin improvement.

Lever 2 — Cost reduction.

Procurement (negotiated rates with suppliers), organizational redesign (reducing layers), shared services (consolidating duplicated functions across divisions), facility consolidation. Typical improvement: 2–5 percentage points of EBITDA margin.

Lever 3 — Revenue growth acceleration.

New product lines, geographic expansion, salesforce productivity improvements, marketing investment, channel partnerships. Often the biggest opportunity, especially for mid-market companies that have underinvested in growth.

Lever 4 — Add-on acquisitions.

Acquiring smaller competitors or adjacent businesses, integrating them into the platform. Operating partners drive both the strategy and the integration. Add-ons typically come at lower multiples than the platform, so multiple arbitrage adds value.

Lever 5 — Working capital optimization.

Reducing receivables, optimizing inventory, extending payables. Provides one-time cash benefit and ongoing capital efficiency.

Lever 6 — Technology and digital transformation.

Implementing ERP, CRM, e-commerce, data analytics. Often a major focus for software and tech-enabled businesses; less central for industrial businesses but still relevant.

The specific mix varies by company. A consumer products business may focus on pricing and brand investment. A B2B services business may focus on sales productivity and salesforce restructuring. A software business may focus on customer retention and product expansion. The playbook is industry-specific within a general framework.

Does operational PE actually work?

The empirical evidence is mixed but generally favorable for top PE firms.

Evidence supporting operational PE:

• Academic research by Davis et al. (2014, 2019) finds that PE-owned companies grow employment and productivity faster than comparable public companies.
• McKinsey's annual private equity research shows that top-quartile PE returns come disproportionately from value creation (operational improvement), not from leverage or multiple expansion.
• Top firms with strong operating teams (Vista, Thoma Bravo, KKR) have consistently outperformed peers over multiple vintages.

Evidence against / qualifications:

• Phalippou and others argue that reported value creation overstates PE's actual contribution — selection bias plus measurement issues inflate the apparent operational benefit.
• The best operating partners are scarce. Most PE firms have a few stars and many average performers. The variance within firms is large.
• Operational improvement in PE-owned companies could be due to compensation incentives, longer-term thinking enabled by private ownership, or simply attention from competent management — not specifically due to PE firm interventions.

The honest assessment: top PE firms with experienced operating teams reliably add operational value. Average PE firms add modest value or break even on operational dimensions. Below-average firms may destroy value through over-cost-cutting or poor management changes.

For LPs evaluating PE firm operational capabilities, the key questions:

1. How much operating partner capability does the firm have? Roster size and quality.
2. What is the operating partner / deal team ratio? Higher means more operational focus.
3. What is the firm's track record on revenue growth in portfolio companies? Operational PE should drive growth, not just margin.
4. How does the firm explain its value creation in track record presentations? Specific examples > general claims.