Freeing Up Your Operating Partner: How Fund Admin Talent Can Extend the Value Creation Team
PE funds are paying outside consultants and operating partners for value creation work that their own back-office teams could be quietly supporting.
Following the COVID-19 pandemic, there has been a well-reported slowdown in private markets investment. That, combined with growing LP pressure for evidence of value creation, has raised the stakes and scrutiny on how that value creation actually gets delivered. These value creation activities often involve bringing in seasoned ex-CEOs or highly skilled Management Consultants to help drive growth, review pricing, set digital and technology strategies and reduce cost. But increasingly, it involves corporate governance advisory from management consulting firms as well. Providing advice on the underlying portfolio company board performance, culture, and operational readiness. All of which, indirectly impact the business performance and ultimately move EBITDA in a positive direction.
Operating Partners have become one of private equity's most valuable assets. Typically, seasoned executives — former CEOs, COOs, or industry specialists — they sit at the center of a fund's value creation efforts, working directly with portfolio company leadership on growth, pricing, digital transformation, and talent, often holding board seats and driving the investment thesis from diligence through exit. Their impact has grown accordingly: operations-driven value creation now accounts for roughly half of buyout returns, up from under a fifth just a few decades ago. But Operating Partners are stretched thin — typically covering several portfolio companies at once, with limited time for the tactical, day-to-day operational work beneath the strategic layer. This is where Fund Administration talent may already have a role to play — not replacing the Operating Partner, but quietly supporting the ground-level execution that frees them to focus where they add the most value.
Despite this opportunity to support the Operating Partner's work, most Fund Administrators have stayed on the sidelines. Historically, few have offered portfolio company services at all — and the ones that do, keep it narrow. But should this be the case?
Why Admins do not historically help:
In my past, I have worked for third party Fund Administrators who do not offer Portfolio Company services as a part of their core service offering. There are several in the market that do, however, they tend to heavily control their service offering to ensure that other business management practices do not bleed into the day-to-day servicing.
There are several reasons why Fund Admins take this stance, such as:
Control framework: controls they have created to offer high quality services were designed around funds, and not diverse businesses. Businesses that must pay staff, property leases and build/operate their core product, which may require complex manufacturing processes – all things that Fund Administrators are not experts on.
System capability: systems operated by Fund Administrators are based around fund accounting and investor services. They can handle distributions and drawdowns, potentially redemptions and quarterly reports, but not staff expenses, inventory tracking or portfolio company KPI monitoring.
Valuation capability: there is the requirement to consistently value these portfolio businesses, which requires different techniques that the Fund Accounting team may not be adept at adopting. This is the key metric driving the investment practices and therefore Fund Admins do not want to get this one wrong!
Scale: the work to be done can drastically increase if portfolio services are offered– meaning extra sets of financials, relationships, cash movements etc. all of which need to be tracked and all of which takes additional resources away from the core Fund Operations.
Cost: The jump up in activity inevitably leads to additional costs within the Fund Admin teams which the Fund Manager does not want to cover, and the Fund Administrator does not want to charge.
Timing and resources: taking key players out of operational teams would disrupt the ordinary flow of work, with Operational teams usually not positioned to parachute into new businesses. In addition, they are already working on incredibly important work, so capacity would need to be found to free up resources to support the Portfolio Companies.
Could Fund Admins do more to support the Operating Partners?
Given the importance of the role of the Operating Partner, and their critical mission of moving EBITDA in a positive direction, there are potentially complementary skills that could sit within their admin teams. Given the high-quality, labor-intensive work covered by the admin teams, the Operating Partners could be using them to support the value creation processes such as:
Cashflow support: fund accountants or finance professionals could be deployed to support with cash collection activities and helping to deliver training on financial discipline and good practices.
Governance and Compliance: Many Funds also employ many highly qualified governance professionals to help their decision processes throughout their business. These individuals have skillsets in board coaching and could help companies fix boardroom tension and coach them through effective decision-making processes to help them flourish.
CRM and Client Service: Investor Services and relationship managers could support underlying service companies to better serve their clients, therefore driving up sales and EBITDA.
Tech migration and deployment: While the core admin platforms are built around fund accounting, the underlying skillset — API and OCR-driven data mapping, and disciplined project management — isn't platform-dependent, and travels well into a portfolio company setting. Often, Fund admins will be taking on Funds from other administrators, with large layers of data trapped behind legacy systems. Operating teams have become incredibly skilled in mapping data points and managing high stakes data migrations from one platform to another. Something which could be interesting following a Portfolio Company acquisitions.
The Business Case
Currently, Fund Managers are hiring highly skilled, experienced individuals to act as Operating Partners to their most important assets. Having a back office to support them in their work, who are integrated into the wider Private Equity Team, and well versed in the reporting practices of the Fund Manager could be beneficial to the Value Creation exercises.
In addition, Fund Admins are frequently faced with the issue of ambitious employees leaving to set up their own businesses or leaving the industry altogether to seek new challenges elsewhere. Offering value creation positions could be the new challenge that these talented staff are looking for and is a chance to contribute to strategic value creation work.
So, what now?
Perhaps it is too much to expect Fund Administrators to become operating partners overnight, but I think it’s only a matter of time until Fund Managers start including the operational challenges at the portfolio level in their broader operational strategies. When they do, they will notice that many of the operational challenges at the portfolio level could be solved through the skillful administrative staff already supporting their funds.
As LPs continue to push for evidence of value creation before capital starts flowing again, fund managers who find low-risk, lower cost ways to deploy their existing talent will likely be the ones investors look to. And with a full, talented Fund Admin team supporting these funds already, maybe the answers could be in their back-office teams already.