Structuring the Value Creation Function
Executive Summary
Three primary organizational models have emerged in private equity: centralized, embedded, and hybrid. Each offers distinct advantages depending on portfolio characteristics, team size, and strategic priorities. There is no universally 'best' model—the optimal structure depends on your specific context.
This white paper provides a comprehensive analysis of each model, including detailed advantages and limitations, implementation considerations, and guidance on when to evolve your structure as your fund scales.
Core Insight: Structure is strategy. The organizational model you choose shapes what your operating team can accomplish—and what it cannot.
The Strategic Importance of Structure
Before diving into the models, it is worth understanding why structure matters so much. Operating teams with identical talent can produce dramatically different results depending on how they are organized.
Structure Determines
- Depth versus breadth: Can your team go deep on a few portfolio companies or provide lighter touch across many?
- Speed of response: How quickly can operating resources be deployed when opportunities or crises emerge?
- Knowledge transfer: How effectively do insights from one portfolio company inform improvements at others?
- Accountability: Who owns operational outcomes—the operating team, deal team, or portfolio company management?
- Career development: What growth paths exist for operating professionals within your structure?
The Evolution Challenge
Most funds do not design their operating structure intentionally. Instead, they make ad hoc decisions as they hire—bringing on an operating partner here, embedding someone at a portfolio company there. The result is often an incoherent mix that serves neither efficiency nor depth.
The most successful firms approach structure deliberately, designing their operating model to match their investment strategy and portfolio characteristics. They also recognize that structure must evolve as the fund scales—what works at $1B AUM may not work at $5B.
The Centralized Model: Deep Dive
In the centralized model, operating professionals sit at the fund level and deploy across the portfolio as needed. They maintain relationships with multiple portfolio companies simultaneously, engaging on specific initiatives rather than holding ongoing operational responsibility.
How It Works
Operating team members are assigned to portfolio companies based on need, expertise match, and capacity. A single operating professional might work with 4-8 portfolio companies at varying levels of intensity. Engagement is typically project-based: a 100-day plan development, a procurement optimization, a sales force effectiveness initiative.
The operating team reports to a Head of Value Creation or directly to senior partners. Resource allocation decisions are made at the fund level based on portfolio priorities. Portfolio company engagement is coordinated with deal team leads to ensure alignment.
Detailed Advantages
- Efficient resource utilization: Operating professionals can be deployed where they add most value rather than being locked to specific companies.
- Cross-portfolio pattern recognition: Seeing multiple companies enables operators to identify patterns—what works in revenue acceleration, common procurement savings opportunities.
- Maintained PE perspective: Centralized operators stay connected to fund-level priorities and economics. Less likely to 'go native.'
- Scalable coverage: A centralized team can provide some level of support across a large portfolio without headcount matching portfolio company count.
- Flexibility in hiring: You can hire for specific functional expertise knowing that the specialist can be deployed where needed.
Detailed Limitations
- Surface-level understanding: Working across many companies means operators may lack the deep context that comes from ongoing involvement.
- Relationship building challenges: Portfolio company executives may view centralized operators as 'consultants' rather than partners.
- Risk of being spread too thin: In a portfolio of 20+ companies with a team of 3-5, engagement depth inevitably suffers.
- Coordination complexity: Managing assignments across multiple portfolio companies requires active coordination.
- Implementation gaps: Centralized operators often develop recommendations but depend on portfolio company teams for execution.
When Centralized Works Best
- Diverse portfolios: When portfolio companies span multiple industries or face varied challenges.
- Smaller operating teams: When you have 1-4 operating professionals, centralized deployment is often the only way to provide meaningful coverage.
- Strong portfolio company management: When companies have capable leadership that needs guidance rather than augmentation.
- Diligence-heavy models: When operating professionals are heavily involved in deal evaluation.
The Embedded Model: Deep Dive
In the embedded model, operating professionals are assigned to specific portfolio companies with substantial ongoing involvement. They may hold formal roles—interim CFO, Chief Transformation Officer, operating board member—or maintain deep engagement without formal titles.
How It Works
An embedded operator focuses on 1-3 portfolio companies with significant time commitment to each—often 2-4 days per week at a primary company. They develop deep knowledge of the business, build relationships throughout the organization, and take direct accountability for operational outcomes.
Embedded operators may report to portfolio company leadership (if in a formal role) or maintain a dual reporting line to the fund. Their success metrics are tied closely to company-level outcomes rather than portfolio-wide activities.
Detailed Advantages
- Deep company knowledge: Embedded operators understand the business at a level that drive-by engagement cannot achieve.
- Strong relationships: Regular presence builds trust with portfolio company teams. Operators are seen as partners invested in company success.
- Direct accountability: When an operator is embedded, there is no ambiguity about who owns operational outcomes.
- Execution capability: Embedded operators can drive implementation directly rather than depending on portfolio company resources.
- Crisis response: When problems emerge, an embedded operator can respond immediately with full context.
Detailed Limitations
- Limited cross-portfolio leverage: An operator embedded at Company A cannot simultaneously drive value at Company B.
- Risk of 'going native': Embedded operators may over-identify with their portfolio company, losing sight of fund-level priorities.
- Higher cost for coverage: Achieving meaningful coverage across a 15-company portfolio requires substantial embedded headcount.
- Extraction challenges: When a portfolio company is sold, the embedded operator may face career uncertainty.
- Management overlap: If a portfolio company has a strong CEO, an embedded operating partner may create confusion about decision authority.
When Embedded Works Best
- Turnaround situations: When a portfolio company is in distress, embedded support can stabilize operations.
- Management transitions: During CEO transitions or when building out a leadership team.
- Carve-outs and transformations: Complex operational situations benefit from dedicated focus.
- High-value concentration: When a single portfolio company represents a disproportionate share of fund value.
- Weak management teams: When portfolio company leadership needs augmentation rather than guidance.
The Hybrid Model: Deep Dive
The hybrid model combines elements of centralized and embedded approaches. Some operating professionals maintain fund-level roles with portfolio-wide deployment; others embed at specific companies based on need. The mix evolves as portfolio circumstances change.
How It Works
A typical hybrid structure includes a core centralized team (often led by a Head of Value Creation) that provides coverage across the portfolio, supplemented by embedded resources at companies requiring intensive support. The centralized team handles diligence, 100-day planning, and lighter-touch engagements. Embedded operators address turnarounds, management transitions, or complex transformations.
Resource allocation is dynamic—an operator might move from centralized deployment to embedded at a portfolio company, then back to centralized as circumstances change.
Detailed Advantages
- Flexibility: The hybrid model enables matching engagement depth to company need.
- Balanced efficiency: The centralized component enables broad portfolio coverage while the embedded component provides depth where needed.
- Career variety: Operating professionals can move between centralized and embedded roles based on skill development goals.
- Risk mitigation: If an embedded operator departs or a portfolio company is sold, the centralized team can provide continuity.
- Scalability: The hybrid model scales more gracefully than pure embedded.
Detailed Limitations
- Coordination complexity: Managing both centralized and embedded resources requires clear governance.
- Potential for inequity: Portfolio companies with embedded support may feel advantaged relative to those receiving only centralized engagement.
- Career path confusion: Operating professionals may be uncertain whether they are building toward centralized leadership roles or company-level positions.
- Higher management overhead: The hybrid model requires more active resource allocation decisions.
- Risk of worst-of-both: If poorly executed, hybrid can deliver neither the efficiency of centralized nor the depth of embedded.
When Hybrid Works Best
- Varied portfolio company needs: When some companies need intensive support while others need only light touch.
- Sufficient team size: Hybrid requires enough operating professionals to staff both roles—typically 5+ people.
- Dynamic portfolio: When portfolio composition changes frequently.
- Diversified investment strategy: Funds that pursue both growth equity and turnarounds may need different engagement models.
Model Comparison: Side-By-Side Analysis
Matching Model to Situation
Evolving Your Structure Over Time
Few funds maintain the same operating structure throughout their evolution. As AUM grows, portfolios expand, and teams scale, the optimal structure shifts.
Typical Evolution Path
Fund I-II ($500M-$2B AUM): Begin with centralized model. Limited headcount (1-3) requires efficient deployment across the portfolio. Focus on establishing processes and proving value.
Fund III-IV ($2B-$5B AUM): Transition to hybrid as team grows (4-8 people). Embed at companies requiring intensive support while maintaining centralized coverage for the broader portfolio.
Fund V+ ($5B+ AUM): Mature hybrid model with substantial embedded presence at key companies and robust centralized capability. Potential for functional centers of excellence.
Triggers for Structure Evolution
- Team size threshold: Adding your 4th or 5th operating professional often triggers consideration of hybrid model.
- Portfolio company crisis: A turnaround situation may force embedded deployment even if your default is centralized.
- Coverage gaps: If portfolio companies consistently request more support than centralized deployment can provide, it signals the need for deeper engagement.
- Integration challenges: If centralized operators struggle to drive implementation, embedding may be necessary.
- LP expectations: As LP operational diligence intensifies, funds may need to demonstrate more systematic coverage.
Managing Transitions
Changing operating structure is disruptive. Plan transitions carefully:
- Communicate rationale: Help the operating team understand why the structure is changing and what it means for their roles.
- Phase implementation: Do not restructure everything at once. Pilot embedded deployment at one company before broader rollout.
- Adjust expectations: Both deal teams and portfolio companies need to understand new engagement models.
- Monitor and iterate: Track effectiveness of the new structure and be willing to adjust based on results.
Governance and Decision Rights
Regardless of which model you adopt, clear governance is essential. Ambiguity about decision rights creates friction and undermines effectiveness.
Key Questions to Resolve
- Resource allocation: Who decides where operating resources are deployed? How are conflicts resolved?
- Engagement authority: Can operating professionals initiate engagement, or must deal teams request support?
- Recommendation authority: Do operating recommendations require deal team sign-off before presenting to portfolio companies?
- Budget control: Who controls budgets for external resources supporting portfolio companies?
- Performance evaluation: Who evaluates operating professional performance? What metrics matter?
Common Governance Models
Deal Team Led
Deal Team Led: Deal team partners control operating resource deployment to their portfolio companies. Operating team serves deal teams.
Advantages: Clear accountability; deal teams invested in operating success. Limitations: May create silos; suboptimal portfolio-wide resource allocation.
Operating Team Led
Operating Team Led: Head of Value Creation controls resource deployment based on portfolio-wide priorities.
Advantages: Enables portfolio-level optimization; operating team empowered. Limitations: Risk of deal team disengagement; potential friction.
Collaborative
Collaborative: Resource allocation decisions made jointly through regular portfolio reviews.
Advantages: Balanced input; broader buy-in. Limitations: Can be slow; requires strong relationships to work effectively.
Recommended Approach
For most funds, the collaborative model works best—but it requires structure:
- Quarterly portfolio reviews: Formally assess operating resource deployment and adjust based on changing needs.
- Clear escalation path: When deal teams and operating leadership disagree, define who makes the final call.
- Transparent criteria: Publish the factors that drive resource allocation decisions so all stakeholders understand the logic.
- Regular feedback: Create channels for deal teams and portfolio companies to provide input on operating team effectiveness.
Illustrative Patterns
The following patterns illustrate how funds have approached operating structure across different contexts.
Pattern A: The Emerging Manager
Profile: $1.5B AUM, Fund II, 12 portfolio companies, 2 operating professionals
Structure: Pure centralized. Both operators maintain fund-level positions and deploy across the portfolio. Heavy involvement in diligence (40% of time); balance spent on portfolio company support.
Key learning: Tried embedding one operator at a struggling portfolio company. Integration suffered as fund-level coverage collapsed. Reverted to centralized with external interim support for the troubled company.
Pattern B: The Established Platform
Profile: $6B AUM, Fund IV, 28 portfolio companies, 8 operating professionals
Structure: Hybrid. Core centralized team of 5 provides portfolio-wide coverage and diligence support. 3 operators embedded at companies undergoing significant transformation.
Key learning: Initially resisted embedding, viewing it as inefficient. A failed turnaround (where centralized support was insufficient) led to adoption of hybrid model. Now embedded deployment is standard for complex situations.
Pattern C: The Sector Specialist
Profile: $4B AUM, healthcare services focused, 18 portfolio companies, 6 operating professionals
Structure: Modified centralized with functional specialization. All operators are centralized but specialize by function (2 revenue cycle, 2 clinical operations, 2 technology/digital).
Key learning: Sector focus enables functional specialization that would not work in a diversified portfolio. Cross-portfolio learning is exceptional—what works in revenue cycle at one healthcare services company directly applies to others.
Conclusion
The structure of your value creation function is not a minor operational detail—it is a strategic choice that shapes what your operating team can accomplish. The right structure amplifies talent; the wrong structure creates friction and limits impact.
Key principles to remember:
- Match structure to context: There is no universally 'best' model. The right structure depends on your portfolio characteristics, team size, and strategic priorities.
- Be intentional: Design your operating structure deliberately rather than letting it emerge through ad hoc decisions.
- Plan for evolution: The structure that works today may not work as your fund scales. Build in flexibility and be willing to adapt.
- Invest in governance: Regardless of model, clear decision rights and coordination mechanisms are essential.
- Monitor and iterate: Track effectiveness and be willing to adjust based on results.
Most funds will find that a hybrid model offers the best balance of efficiency and depth as they scale—but getting there requires thoughtful evolution from the centralized starting point. The journey matters as much as the destination.
The firms that approach operating structure strategically will find their teams more effective, their portfolio companies better supported, and their returns enhanced. Structure may not be glamorous, but it is foundational.
About Press & Associates
Press & Associates is a specialized executive search firm focused exclusively on the private equity ecosystem. Our expertise in portfolio operations and value creation team building positions us uniquely to help PE firms compete for the industry's best operational talent.
PAUL PRESS
Managing Partner
paul.press@pressandassociates.com
