The role of the operating partner, with Asaad Salhab

[00:00 - 00:23] Hello and welcome to the GC Call. This is a podcast we're bringing to you from Gulf Capital, the leading alternative investment firm in emerging markets from North Africa to Southeast Asia. I'm Nabil Ismail, Executive Director. And I'm Albert Abella, Managing Director in the Private Equity Team. Think of the GC Call 

[00:23 - 00:46] as a window into the investment process. In addition to our own expertise, you'll hear from other regional investors, entrepreneurs and management teams, as well as advisors who participate in the overall process to demystify it together. We're joined today by our senior operating partner, Asaad Salhab, to dig further into operations. On our previous episodes, we've talked about the role of the board and also 

[00:46 - 01:08] discussed financial and legal due diligence. So today, we're talking to Asad about the role of the operating partner, how the process begins, the 100-day plan, and how we partner with management via the board. Asaad has been with Gulf Capital for the past decade, has over 30 years of experience in leading several integrations across Europe and MENA. We started out by talking about the role of the operating partner before the deal is done. 

[01:08 - 01:28] If you look at the DD stage, before that, it's all the deal team figuring out the deal, sorting out the stuff, getting it and approving IC. And then you have a deal that you're looking at. That's a potential. In there, in the DD, what's the objective? You need to maximise your learnings of this portfolio and where do you want to end up so that you shape your 

[01:28 - 01:50] future faster. And you need to look at it at two things, a tactical element and a strategic element. And why do I say this? If you look at the tactical element, this is where you learn about the company, the processes, the organisation, the systems. So you come up with your 100-day plan and then your annual plan and so on, of what do you want to do 

[01:50 - 02:12] in supply chain? How do you want to optimise your logistics? How do you want to structure the organisation, the capabilities in the organisation? How do you want to work them? How do you want to bring digitisation and automation in it? These are all things within the tactical elements of the 100-day and the one-year plan. The strategic is where you look at your value creation. And this is where closely with the 

[02:12 - 02:34] deal team and all the advisory and the consultants and the things that you bring, where you define You're buying a company of certain shape and form, but you're exiting a different company. So how does that company look like? What do you want it to be? What are the four or five major elements that you want to work on to make sure that this company looks different 

[02:34 - 02:58] and it's more attractive for the next buyer and it will bring the value that you want? And that's what we call the value creation. So during the DD period, those are the two elements that you work on so that when the deal is closed, you hit the ground running in the hope that you can deliver faster implementation and then hopefully faster exit, which will 

[02:58 - 03:23] improve your IRRs and fix your MOMs and so on. You mentioned the 100-day plan. At what point in time do you agree and is this an alignment that's already in the shareholder agreement? Is this an alignment with the founder that from day one, this is how the process is going to run? And is all of this documented? Look, the 100-day plan is something that you develop during the DD and since you're engaged 

[03:23 - 03:47] with management, management are part of it. Now, I think our secret sauce of what we figured out is that we've added that and the value creation to be part of the SHA signed if we still have a partner because usually we're majority buyers. So whoever is sticking along will have to sign on both that this is up now. These are not written in stone and it 

[03:47 - 04:11] doesn't mean that they're fixed for the five years. Conditions change, things around us change and they could evolve. But at least the initial direction and strategy you're heading, you get management to sign on it because they've been part of developing it with you and you get the partner to sign off so that you're both working in the same direction. So you get as part of your SHA, absolutely. That's the secret element that we've been 

[04:11 - 04:34] doing over the last few years. And maybe to explain to the listeners, the 100-day plan versus the first year, how does this differ? Why is there such a thing as a 100-day plan? The 100-day plan does not mean, and a lot of people understand that wrong. The 100-day plan is I execute it and it's done in 100 days. Show me some that or one that's actually 

[04:34 - 04:55] done. 100-day plan is to make sure that you kick off and kickstart everything that you want to do that's major and you get it in action. So if it finishes within the first few months, good and lovely. If not, falls into your annual plan and this is where you 

[04:55 - 05:22] actually lead it to completion. But the 100-day is to make sure that you kickstart your work. So everything that big that you want to do, you make sure that you kick, you start it within the first three months that you're in. You want organizational changes, you do that. You want digitization and automation, you bring the experts to do that. You want supply chain and logistics and ERP introduction. Okay. For sure, this is not a 90-days job, 

[05:22 - 05:42] but at least in the 90 days, you bring in the experts and the resources to start the work. So you make sure that you stand a chance to finish it within the first year. Because our principle is usually that we try to finish our heavy lifting within, let's say, the first year, 18 months, two years max. And this way, third year, you stabilize. Fourth, you're 

[05:42 - 06:04] ready to prepare for exit. So in order to stand the chance of doing that, you need to really kickstart all your heavy lifting in the first 90 days. And you mentioned something very interesting, which is organizational change. So at what point in time do you decide that I would actually not want to do the deal unless there's an 

[06:04 - 06:24] organization change, or is it part of the 100-day plan? So how do you maneuver? Because sometimes it could be the CEO himself or herself, or it could be the CFO, or it could be someone else, which is very senior in that role. So do you decide not to do the deal because you don't have the right management? Or do you decide, no, this is a great company, it just 

[06:24 - 06:50] lacks some changes? And when do you enact these changes? First of all, we're heavily involved operationally, but that doesn't mean that we actually run the companies. We run the companies through management. So management has to be strong. And we go into companies with the premise that management are what they are. Now, the DD usually lasts, what, three, four months? And with those, you really actually spend 

[06:50 - 07:15] a lot of time with management. So you see them in action, you see how they do, you see the team around them, you see their track record, you see the results. So you get an assessment. Now, sometimes it's in your face that, no, this is management that needs to change or one or two or whatever. And you take your time in the DD also starting to prepare the successors. So you start to get them or you'll decide, no, this management 

[07:15 - 07:39] team is OK, needs some guidance and coaching. You do that and you start working with them in the first few months in the deal. If they really don't pull their weight and deliver what you want, then you don't shy away from making the decision. You don't have all the time in the world. You've got the time frame for the portfolio to do value creation and management needs to be with you. So we're not to replace management. We're there to 

[07:39 - 08:03] support management and to make sure it's the right management. But we don't shy away from making decisions on changes. I think that's great. Specifically, when we talk about we are operating through management, because that's one thing that a lot of times people think whenever you have an operating partner, he's a replacement of management or he comes in as a deputy CEO. But that's not the case. We're there to support management. We're there 

[08:03 - 08:24] to make sure that we are running the company through, as I like to say, you know, board or committees. So can you explain to us how does that process look like when you've gone through your 100 day plan? You said we're a lot more involved initially, but then over time that involvement becomes less and less. And how do we manage through the board? 

[08:24 - 08:46] I used to run companies, managing director and so on and so forth. And I'll tell you, one of the most lonely jobs is being the head of an organization, a CEO, an MD or whatever. You've got to report into a board. And then the board are your friends, but they're also they're your bosses, whether you like it or not. And your team, your leadership team, 

[08:46 - 09:07] as much as they're your team, there is a limit to what you can share and so on. So you're in there and lonely. I think this is where the beauty of where the operating partner plays. He becomes he plays two roles on the board as a governing body, on the operating committee as an enabling element to the CEO and the management team to help them break 

[09:07 - 09:33] barriers, move things, guidance and so on, and to the CEO himself as a mentor. So it's a balance of the three. And you work it that way. And that's the way you drive it with management. I'll pick up on something you said is do operating partners actually run companies? I think that's a wrong thing to do. And we had an example of those where we 

[09:33 - 09:54] at one point of time had a gap in one of the companies. One of our colleagues had to jump in and run the company and he managed. But the neutrality is gone. When you're running the company, it's your company and you're biased to what you're doing. While an operating partner is working with the management, you're still on the outside. You're still with them, 

[09:54 - 10:16] but on the outside. So you have the neutrality. You can support them, but you can hold them accountable. You don't have to defend the results because they're the team results. You're part of it, but it's not yours. So that element is there. I think that was a good learning that operating partners need to work with management, but ideally never. Now, if we have 

[10:16 - 10:38] an urgent vacancy that we need to fill for whatever reason, yes, we can jump in for a month or two until we get a successor, but you don't keep on running it. That's not the best idea for an operating partner. And you've mentioned the operating committee, because typically you'd see the audit committee, you'd see the remuneration committee, but operations committee, that's 

[10:38 - 11:00] something that's not very common in a lot of publicly listed companies. I might be mistaken, but what's the role of that committee? As part of governance, which is what we bring into all these companies, you start with a board structure and the board delegates to certain committees, certain tasks, as you said, the delegation, the comp and ban, and the audit, 

[11:00 - 11:22] and so on. The operating committee is basically, the idea is that the people who are closer to the management and hold their hands through the process. Our structure is because we're into different industries. There is no way that we will have all the skills within our operating 

[11:22 - 11:45] partners or even within the full team. We're into health, general, we're into technology and fintech within it. We're into business services, and we're into sustainability, we're into consumer goods. No way that you'll have all these skills. So the way we do it is we always go to non-executive directors that help us, and these are industry experts, people who've been there, 

[11:45 - 12:05] done that, established track record, solid, solid track record, and you bring these in. So they sit on the board, but you don't want them to show up once a quarter, look at reports and results, and they disappear. You need to benefit from their know-how, from their history, from their skills, from their industry knowledge, because these guys are usually still abreast 

[12:05 - 12:28] of what's going on in those industries. So being on the operating committee, those guys would help management on deciding what's wrong, what's right, prepare for what's coming, give guidance and experience. Yeah, you've done that, no, take this learning, make sure that you avoid it. So that's kind of thing. So the operating committee kind of meets more frequent, so we meet with management on a monthly 

[12:28 - 12:49] basis, sometimes biweekly in the beginning of the investment. We have our own track record of KPIs and reports and so on. The whole objective is to help management manage through this period and really drive the growth as we want it. I mean, that's interesting in terms of the flexibility 

[12:49 - 13:14] that we need to bring, right? Because at the end of the day, what you're saying is our Rolodex is not sufficient. Or let's put it another way, you want to expand your Rolodex by leveraging also the connections and the know-how of the people that you bring from abroad, from outside. So I think we can talk about a few examples where we have leveraged the independent director's 

[13:16 - 13:38] experience and network to bring in other resources, other skill sets, other, let's say, relevant connections, which I think that's the key part, right? Allow me here to correct one thing. You said our Rolodex is not wide enough to get there. No, we've got the contacts and so on. We use them as well for networking, for contacts, 

[13:38 - 14:01] for bringing people from their side, absolutely. But the idea is, as we said, Alvaro, we're semantic investors into these five. If you want to bring experts in-house who can only serve, imagine on the burn rate that you will have to carry as an organization, waiting for the deal to come. So an optimum way of doing it is really have a solid operating partners that can work, 

[14:02 - 14:25] generalist if you want, organizationally, they've done it, and they can be sector agnostic. But then as you go into a deal within a specific sector, you go to those specific skill sets that you need, and you go for those non-executive directors. Usually when they come, they bring you the industry knowledge, they bring you the know-how, and they also get you a Rolodex of 

[14:26 - 14:46] experts in that field. So today, if you want, I've got a Rolodex of something like 250 experts that we tap into. But those are organizational, supply chain, accounting, governance, you name it, all the functional skills if you want, we've got those. But tomorrow you go into fertility clinics. 

[14:47 - 15:07] Would I have a doctor who specialized in fertility clinics? That's a bit difficult. This is why you will bring in a net from that industry, and he'll bring you those expertise along with him. Pitfalls, what not to do. I think we've learned a lot during our almost 

[15:07 - 15:33] two decades of running and managing and dealing with different boards, operating committees, the role of the operating partner, a lot of things have evolved. So probably it'd be great to hear from you things that you want to suggest to our listeners. These are things within a board setting, within an operating partner setting, you should not do. Allow me to say what you should not 

[15:33 - 15:56] and also what you should. I am some of them. And humbly I would say in our opinion, it is what we should do. Some people might disagree. What you shouldn't is you shouldn't shy away from making the tough decisions early when needed. And we've been burned so many times, oh, let's give this person an extra time to do that. Or no, let's wait and see, maybe the market will change here or 

[15:56 - 16:17] there and then we can recover this or that. And we always come down most of the time to regret it. So don't shy away from making the tough decisions early on. It always pays off. The other thing is you should. And that's what we talked about earlier. You're into returns and investments, 

[16:17 - 16:40] so you need higher returns, faster returns. So use the D.D. and don't shy away from deep dive into the company with management, into the nitty gritty, do your worst case scenarios. Don't only look at rosy scenarios because usually the deal team and the operating partner, part of the deal 

[16:40 - 17:03] team, we want to close the deal. And we look at, yeah, this is the business plan. This is how solid it is. And we look at the rosy side of it. I think the thing that we should do more often also look at the potential worst case and the downsides that could come so that I'm not saying to kill the deal. On the contrary, just to make sure that we're equipped for those and we've got action planned 

[17:03 - 17:27] for them. The other thing is, as I said, finish your 100 day plan and the value creation in the D.D. So you hit the ground running. Historically, in the good old days, people would close the deal and then you start putting your value creation plan together. You would lose another six to eight months in there. So doing it during the D.D. gives you a head start. One of the things that for 

[17:27 - 17:52] us is important is aligning management. This is a journey that you're moving ahead with and management are crucial in it. So you need to make sure that you and management are aligned on the outcome and they have a stake in that outcome. Because this way, along with your other shareholders as well, this way you're all driving the boat towards the same direction and you don't have 

[17:52 - 18:16] dynamics in the company. You don't have different tracks. You don't have people doing things differently. You're all shipping towards the same direction. How do you align management? You align management through an incentive program and each company would have its own. Some have phantom stock options, some have shares, some have stock shares. You can develop your incentive 

[18:16 - 18:41] program, but they need to have a stake in the upside at exit. That management realizes that I have a stake in the value that I create. So I bought the company for a hundred million. I'm selling it at a hundred. I get nothing. I'm selling it at a hundred fifty, which is in the lifetime still within the cost. I got nothing. But when I still when the investors and the 

[18:41 - 19:03] shareholders make money, I make money. So if I sell it for three hundred, I make on the upside of the differential. And it's something substantial. Usually you design it that it will be relatively a life changing thing for them. We've seen it in all our portfolios. Managements get hooked in and they actually are fully aligned and they work as hard as any of us. 

[19:03 - 19:28] I think that that is the key, right? When you said they're really committed when they have ownership and they understand how important their role to the overall long term goals, the execution and attainment of those long term goals is so that everybody is sort of rowing in the same direction. I think that that is really key in terms of securing that alignment. 

[19:28 - 19:53] So not only the carrot at the end of the or the pot of gold at the end of the rainbow, but really that sense of ownership in the business and that their role is key to achieving those goals. No, absolutely. I was having a conversation with a CEO of a different company and he basically was saying, again, this is probably a Middle Eastern thing, but there is this notion that, 

[19:53 - 20:19] you know, you're you're a pure employee, like you can be fired at any point in time. We don't view management that way. They need to be part of the same journey. They need to be part of that exit and most importantly, also roll them over for a bigger journey with the next buyer. Yeah, absolutely. And that's one very important element, because when you're finishing your company or you're building the value creation and towards exit, the next buyer wants to buy 

[20:19 - 20:40] into an institution, not individuals. And he would like those leaders that are carrying that institution to continue with him. Otherwise, you're buying an empty shell. So you need them to be incentivized enough to work with you, but also incentivized enough to carry that forward to the next buyer. And then it's up to the next buyer to incentivize them to continue in his journey. 

[20:40 - 21:04] But for you, that's what we need to carry them. I mean, I think that those are two great points, Nabil and Assad, what you're making regarding that partnership approach and the role of each of those, let's say, partners, whether they're executives or you look at it at the board level, right? We were talking about this with Nick on the other episode where everybody needs to serve 

[21:04 - 21:29] the long term purpose. And if somebody at the board is not pulling their weight, just like in management, you have to change that. You have to have the right skill set and the right experiences for that specific challenge, that specific growth period in the company. So I think that's key and how to align that is something that we've been able to sort of adapt throughout the two decade 

[21:29 - 21:53] history of managing businesses from growth to exit. And maybe Alvar, I wanted to ask you on the same front, because a lot of this comes from a PE mindset. Like how does it work with growth when you have different investors coming in at different stages? I think there it's even more clear, specifically, if we go back to sort of sitting around the board, the earlier stage 

[21:53 - 22:19] investors, when a business matures, they have a very clear understanding that their role, their experience, that their ability to contribute more specifically is diminished. And that other investors that have other capabilities and have other experiences they can bring to the table are more, let's say, appropriate or adapt at bringing those experiences 

[22:19 - 22:39] and those capabilities to the table. And so there is a natural sort of renovation of the people and the skill sets at the board. That's typically how it happens. There's a handover of sort of the management capabilities of the board. And that I think is just natural evolution. At the end of 

[22:39 - 23:00] the day, we always say companies are living organisms, right? Whether it's at the board level or the management level. Thank you for joining us on the episode of the GC call with me Nabil Ismail and Alvaro Abella. The GC call is brought to you by Gulf Capital and is produced by Amaeya Media. 

[23:00 - 23:12] You can follow the show on your favorite podcast app, Apple Podcasts, Spotify, Anghami, Pocket Casts and all of the others too. And we'll be back again in two weeks.