Taking the Pulse of Operating Partners Heading into 2025

Taking the Pulse of Operating Partners Heading into 2025

Best practices in value creation, talent, and technology were all on the table at this year’s PEI Operating Partners Forum. Here are some key takeaways.

TBM senior leaders Shannon Gabriel, Gary Hoover, and Ranjith Rajendran attended PEI’s Operating Partners Forum in New York City last month, one of the largest gatherings of operating partners on the calendar each year, where the focus was on best practices for optimizing portfolio company performance. Gary served as moderator for a PE panel that discussed best practices and strategies for helping portfolio companies navigate the high-interest rate environment, while Shannon and Ranjith sat in on several workshops and panels. Each share their thoughts in the following Q&A.

What were some of the main topics and themes you heard from operating partners? Did anything surprise you?

SG: There was a strong focus on people and finding new ways to attract, retain, and develop the best talent possible. The topics fell into three buckets – 1) an increasing focus on leadership performance solutions, 2) what to do if you think you may not have the right talent in place, and 3) how to address growing skills gaps before they become problematic.

GH: Given the ongoing high-rate environment and the fact that so many portfolio companies are carrying record-high debt burdens, I thought we might have heard more about the stress of trying to grow while keeping pace with those loans. But as one of our panelists pointed out, the long-term value creation toolbox – which ultimately drives PE performance – really hasn’t changed all that much despite the high rates and higher debt. Cost savings was a common theme but certainly not a dominant one. It was more about balancing cost to serve with growth'.

RR: One takeaway for me was just how much the PE firms and their portfolio companies are looking at short-term actions which can make near term impact. Everyone is waiting for deal flow to improve, and they simply don’t have the luxury to be looking and planning years out. So, they are looking intensely at how to improve from within and faster.

Let’s get into the talent discussion details. What stood out?

GH: Picking up on Ranjith’s point, and tracing back to what we said earlier about the long-term fundamentals of value creation remaining intact – one of the primary catalysts behind successful value creation is a company’s leadership team. There was some frank discussion about the need to continuously monitor and assess portfolio company management teams to ensure that plans stay on track. People had different views on how best to go about doing that. For example, one panelist whose firm focuses on distressed investments felt strongly that delaying the inevitable – in this case, not removing senior leadership talent you know is underperforming – can quickly bring negative consequences, not the least of which is an erosion in accountability and morale. Another panelist stressed the importance of continuous two-way dialogue, and two of the four panelists say they closely monitor any covenants in place to ensure the portfolio company leadership team is engaged and executing.

SG: It’s a popular issue for sure. I caught a separate panel that discussed leadership evaluation, and one message that came out loud and clear is that too many operating partners are managing from a distance. The portfolio companies are putting the onus on the partners, and saying they need to be more engaged and proximate so they can get to know the businesses inside and out, including the all-important management team.

Where are firms at in terms of using new and emerging technologies like AI or automation to strengthen their businesses and create value?

RR: My general sense, and I think we all agree, is that most companies still find it challenging to understand where and when technology and automation should be used, and when it may not be necessary. Some are good at it, and have deployed automation sensibly, for example, in ways that can help cut down on the frequency of human error or improve worker safety. Automation can make sense, but it should be adopted incrementally, and companies need to closely track their ROIs.

SG: Regarding early adopters of AI and any best practices around using it – I walked around specifically listening for any a-ha’s but didn’t hear any. Companies by and large recognize the need to use AI and understand how it works, but there weren’t many case studies of how they are applying it to impact business or operations, which indicates that we’re still very early in terms of seeing any applicability for driving real growth and value – but it’s coming.

Any closing thoughts?

Overall, Gary, Shannon and Ranjith were impressed by the pervasive mindset of yes, the environment remains challenging, rates are high, debt burdens are burdensome… but the work of creating value never stops. Instead, it was about working harder and finding those critical levers to drive growth. That stood out, as did an increasing focus on the need to assess the true performance of portfolio companies’ senior management teams to ensure that the most important value creation catalysts of all – your high-end talent – is performing at an optimal level.