Adding Value as a PE COO

1

• Adding Value as a PE COO
• Calling on COO colleagues in Boston and New York,
  I mapped the typical COO duties, the areas where
  some COOs are adding value to the portfolio, and
  some possible areas for future COO contributions.
• At least in the US, the COOs role is defined to
  complement the interests and abilities of other
  team members (more so than the CFO). Even so,
  the COO role has a typical core of internally
  focused tasks. There are also some outward
  facing functions that are allocated to either the
  CFO or COO. Some best of breed firms have
  COOs with portfolio enhancing functions. (E.g.,
  Blackstone, Riverside.)
• Most of the COOs future is in creating ways to
  add value to the firm and the portfolio, and the
  frontier is using risk management to enhance
  returns rather than limit opportunities.
• Partnering solutions have come and gone, and now
  come again, with more aggressive and better
  product offerings. Robertson Stephens was the
  partner of choice for stock distributions.
  Citizens Bank has a decade-long history of wrap
  solutions for PE banking needs, and Wells Fargo
  is currently considering a PE product wrapping
  cash management, short term financing and
  industry expert insurance brokerage, all with
  portfolio level discounts.

2

• Inward facing, administrative duties
• In firms that have a COO, the core duties relate
  to the administration of the business. Some of
  the duties address facilities and IT, some cross
  between COO and CFO. A third set emerges only if
  the firm pushes for excellence in its internal
  operations.

3

• Adding Value to the Portfolio
• Increasingly, VC and PE firms are actively
  managing portfolio companies. The process seems
  to ramp through four areas metrics and
  monitoring, purchasing programs, cash management,
  and then active consulting as an extension of
  management. The COO can participate as a
  diagnostician, helping with staffing logistics,
  as part of a consulting team, et al.. The COOs
  role becomes a reflection of abilities and
  bandwidth more than job title.

4

• New Areas and Leading Edge
• Creative COOs are moving fund administration
  into the best practices established for other
  services companies.

5

• A swirl of other issues
• Several large scale issues are affecting the
  operations of private investment firms, and will
  continue to challenge industry COOs. Some are
  listed below.

• New analyst and associate hiring is down sharply,
  and the changing staffing profile is forcing
  process changes at all funds. In general, deal
  teams are more tightly focused on making
  investments and exits, and non-deal professionals
  are working other aspects of portfolio
  development.
• When you cant exit and valuation multiples dont
  increase, you have to get gains from better
  operations. The pressure for improved margins
  has many effects, and one is faster development
  of internal consulting teams.
• Increasingly sophisticated outsourcing
  alternatives can change the COO into to a
  coordinator of third party providers. The
  re-configured role emphasizes negotiation and
  confrontation over analysis, and limits the COOs
  use in portfolio company work.
• Fund CFOs and COOs are willing to share
  information, but not rewarded for doing so. The
  previous slides are based on conversations with a
  handful of well-connected COOs, but not
  supported by a statistically valid sample.

6

• Appendix
• Duties commonly delegated by the General
  Partners. The COO job starts by facing inward

A long list, but quickly becomes
routine Operations side of investor
communications Review, grammar and fact check all
investor information Create and maintain investor
information center (Sharepoint, other) Review and
assemble financial statements into investor
communication Production and distribution of
online and hard copy Treasury and banking Review
and verify controls over cash and securities (one
in finance, one deal partner) 3rd party custody
of physical securities (lock box with auditable
log) Credit line for funding between capital
calls Drive account structures and payment
systems to the lowest total net cost for
payments, funding, FX, wires, other Cash flow
optimization mechanics of cash collection and
disbursements Compliance function Training
(welcome to confidentiality and capital market
regulations) Monitoring (brokerage account
copies, et al.) Reporting (quarterly internal
and/or external) Fund raising process Administrati
ve systems / prospect tracking Document the track
record and establish the documents
room Structuring to market terms and tax
optimization Know Your Customer
process Coordinate with counsel to orchestrate
rolling? closes Subscription review and
documentation Kick off meeting? First call and
surrounding investor communications Investment
process New deal and follow on processes - define
it, document it, write it into the DNA of the
organization. Checklists for commitments,
checklists for funding. Guidelines to pre-empt
conflict issues between funds Guidelines to
pre-empt conflict issues between parallel equity
and debt funds, and shared services
operations Role of advisory committee in emerging
issues and handling exceptions Operating policies
and procedures Facilities manager functions HR
Legal IT