Key takeaways on the role of Operating Partners
- Operating Partners support the execution of the investment thesis following the acquisition.
- Technology assets are increasingly influencing value creation within portfolio companies.
- Artificial intelligence initiatives are becoming a management focus in their own right.
- A Tech Due Diligence carried out at the time of acquisition provides an initial overview of the acquired company’s technological status.
- Continuous Diligence enables the monitoring of evolving risks and opportunities throughout the holding period following a Technology Due Diligence.
Who are Operating Partners?
Operating Partners support private equity funds once they have acquired a company. Their role is to help the company’s management teams implement the value creation plan set out in the investment thesis.
In particular, they focus on:
- organic growth;
- improving profitability;
- build-up operations;
- organisational transformations;
- preparing for the exit.
Their role is to identify the levers likely to enhance the company’s value and to ensure that the actions taken deliver the expected results. In practice, they act as the link between the fund’s objectives and their operational execution.
Why the role of Operating Partners is becoming increasingly important
Private equity funds are now paying increasing attention to operational value creation. Investors no longer rely solely on market growth or financial mechanisms to generate returns.
This shift naturally strengthens the role of Operating Partners. Their remit is no longer limited to supporting management. They must also measure progress, identify deviations from the initial plan and adjust priorities where necessary.
To fulfil this remit, they need a regular understanding of how their portfolio companies are performing and the factors likely to influence their growth trajectory.
Tech Due Diligence illuminates the investment thesis
At the time of acquisition, Technology Due Diligence provides investors with an objective view of the state of the company’s technological assets. It enables them to evaluate their capacity to support the ambitions set out in the investment thesis, whether these involve accelerating growth, integrating acquisitions, developing new products or preparing for international expansion.
This analysis serves as a working basis for the Operating Partners. It highlights areas for attention, anticipated investments and value creation drivers that will need to be monitored throughout the portfolio’s lifecycle.
Why Technology Due Diligence carried out at the time of acquisition is no longer sufficient
Whilst Tech Due Diligence enables the assessment of the main technological risks and opportunities prior to the acquisition of a software company, it essentially reflects a particular technological situation at a given point in time.
During the holding period, the company continues to evolve. Teams evolve, new products are developed, further acquisitions may be integrated, and strategic priorities shift.
For Operating Partners, the challenge therefore lies in understanding how these developments influence value creation and whether they remain consistent with the assumptions made at the time of investment.
In particular, they seek to monitor:
- changes in technical debt;
- the platform’s capacity to support growth;
- the successful integration of acquisitions;
- the maturity of the technical teams;
- progress on strategic projects;
- artificial intelligence initiatives and their ability to support the investment thesis.
This approach enables the quicker identification of any deviations that could affect the company’s future performance.
AI: a new driver of value creation to keep an eye on
For many private equity funds, artificial intelligence is seen both as a driver of productivity and a differentiating factor for their portfolio companies. Part of the future valuation of certain companies now rests on their ability to effectively integrate AI into their products, operations or customer relations.
Operating Partners will therefore need to be able to assess the ability of portfolio companies to adopt new AI tools. In particular, they seek to understand:
- the use cases that have actually been identified;
- the quality of the available data;
- in-house expertise;
- the necessary investments;
- the expected operational benefits.
For Operating Partners, the challenge lies in verifying that AI initiatives actually deliver the expected value and support the investment thesis.
How Operating Partners monitor the implementation of the investment thesis
For an Operating Partner, value creation is not measured solely by financial indicators. An increase in revenue or EBITDA is a positive sign, but does not always provide an understanding of the factors underpinning this performance.
They also need to regularly verify that the assumptions underpinning the investment remain valid.
Operating Partners will therefore monitor a number of indicators, including the company’s technical capacity to absorb growth, the availability of key resources and skills, and the risks likely to slow down value creation.
The earlier these gaps are detected, the easier it becomes to adjust priorities and maintain the value creation trajectory.
Continuous Diligence: an approach designed for the holding period
It is precisely to meet this need for ongoing monitoring that certain operational teams within private equity firms are turning their attention to Continuous Diligence approaches.
Continuous Diligence enables the work carried out during Tech DD to be continued beyond the acquisition, in order to monitor the development of the key value creation factors throughout the duration of the investment.
For Operating Partners, this approach provides a more dynamic view of the company. It enables them to verify that the actions undertaken are producing the expected results and to quickly identify new risks or opportunities.
In practical terms, continuous technology due diligence enables Operating Partners to monitor, over time, changes in technical debt, cybersecurity risks, the scalability of the platform, the maturity of the technical teams, and the maturity and relevance of artificial intelligence initiatives.
These indicators document performance monitoring throughout the portfolio’s lifecycle, thereby progressively contributing to the preparation for the exit. They enable progress to be demonstrated in real time, allow the trajectory to be adjusted ahead of the exit, and provide the necessary reassurance during Vendor Due Diligence.
Preparing for the exit from the very first years of holding
For private equity funds, the average holding period for a portfolio company is around seven years. However, preparations for the exit should not begin just a few months before the sale. For Operating Partners, this process should ideally begin in the early years of ownership through regular monitoring of the performance of the companies in their portfolio.
Continuous monitoring of these areas enables progress made throughout the investment period to be documented. This documentation facilitates and accelerates the preparation of Vendor Due Diligence by providing a history of analyses, actions taken and progress made.
For funds, the challenge is to demonstrate how the investments made throughout the portfolio holding period have enhanced the value of the asset.
Monitoring technology assets during their entire portfolio lifecycle
Operating Partners focus their efforts on improving operational performance, driving growth and implementing transformation plans. As technology evolves at an ever-faster pace – particularly driven by AI, which facilitates code generation – the methods used to monitor performance must also evolve.
This is precisely the aim of the Technology Due Diligence and Continuous Diligence approaches developed by Vaultinum. The former enables an independent assessment to be carried out at the time of acquisition. The latter provides regular insight into the evolution of technology assets, the impact of AI on these assets and their quality, and their contribution to value creation throughout the holding period.
