In this model, former senior executives with sector-specific experience join the private-equity firm as general partners. Like deal partners, these generalist operating partners are typically compensated through some combination of fixed salary, annual bonus, and carried interest (carry), which is a share in the profits that the private-equity firm makes on its investments. They may also receive options in the portfolio companies they work with, and they sometimes are required to coinvest as a limited partner in the private-equity firm’s fund.
Much like external advisors, generalist operating partners are usually former CEOs or CFOs with enough experience in the private-equity firm’s target industries to have credibility with portfolio company CEOs. They act as key interlocutors with those CEOs in the development of company strategy and generally serve as coaches and “sparring partners” on a whole range of issues on the CEO agenda. Another important role is to be the private-equity firm’s primary overseer of operational-improvement programs at portfolio companies. They do not, however, get deeply involved in the day-to-day running of the business.
One of the attractions of this model, compared with the external-advisor model, is that it brings substantial industry and operational expertise directly into the private-equity firm and therefore offers the opportunity to integrate this expertise more fully into both predeal due diligence and postdeal work at the portfolio companies. But for the model to work, it is critical that the generalist partners be fully accepted by the deal team. If generalist operating partners are simply imposed on the deal team by the firm’s management or have backgrounds so different from those of the deal team that the two sides never really connect, the model tends to break down. Therefore, it is critical to hire operating partners who already have or can develop the right mindset for work in private equity. Traditional “command and control” executives typically do poorly in this role.
Even more than senior advisors, a generalist operating partner runs the risk of being perceived as a CEO-in-waiting by management at the firm’s portfolio companies. “Our experience is that it is difficult to bring in generalists,” one general partner told us. “The CEO immediately starts worrying, ‘Is this guy going to be my replacement?’” This risk can be mitigated by linking the incentives of generalist operating partners to overall fund performance, which gives a clear sign that they will be staying in their roles at the private-equity firm for the long term.
A key limitation of this model is that it is not easily scalable. Generalist operating partners can engage with, at most, about five portfolio companies during the same time period. When they try to cover more, their involvement is usually restricted to board-level interactions, where their ability to impact the business is relatively limited. In a typical midsize private-equity firm using this model, there might be at most a handful of generalist operating partners, which can make it difficult to have the necessary breadth of sector experience to support a multi-industry investment strategy.