The Operating Record: What It Supports and What It Does Not
An operating record shows what partners did inside companies. Read by evidence class, it supports claims about capability and conduct, not returns or causation.
By José Vasquéz, Managing Partner
11 min read · Growth Equity
In this note07 · 11 min
An operating record is evidence of what named people did inside companies: the roles they held, the decisions they could make, and the conditions they worked through. Read by evidence class, it supports claims about capability, judgment and conduct. It does not support a return expectation, does not prove that an investor caused a company's results, and does not travel to a new sector or firm without further proof.
01The Operating Record and the Investment Record
Allocators evaluating growth equity firms now meet two records in the same data room. The investment record is a set of cash flows: capital called, capital returned, and the residual value of what is still held. The operating record is a set of facts about people: who ran a commercial launch, who sat on which board, who rebuilt a quality system, who negotiated with a payer. Most confusion in operator-led diligence comes from reading one record as if it answered the other's question.
The operating record has become more prominent because sponsors describe their value creation in operating terms. In a survey of 79 private equity investors with combined assets under management of more than $750 billion, Gompers, Kaplan and Mukharlyamov found that investors anticipate adding value to portfolio companies, with a greater focus on increasing growth than on reducing costs.
Acharya, Gottschalg, Hahn and Kehoe report that general partners who are former consultants or former industry managers are associated with outperforming deals focused on internal value-creation programs, while former bankers and accountants are associated with outperforming deals that involve significant mergers and acquisitions. The finding matters for how an operating record is read: background predicts the kind of work a partner does well, not a level of return.
Even the investment record predicts returns poorly. Using cash-flow data and only the information an investor would actually have had when the successor fund was offered, Harris, Jenkinson, Kaplan and Stucke find little or no evidence of performance persistence for buyout funds after 2000, while persistence for venture capital funds holds. If prior fund performance is an unreliable guide to the next buyout fund, an operating record, which contains no fund cash flows at all, is weaker still as a guide to returns. Its value lies elsewhere: it is the best available evidence of what a partner can actually do inside a company.
02The Regulatory Boundary
The legal frame for how a sponsor presents its operating history is the Investment Adviser Marketing Rule, 17 CFR 275.206(4)-1, adopted in Release No. IA-5653. The rule applies to advisers registered or required to be registered under section 203 of the Investment Advisers Act. Advisers outside that scope remain bound: Rule 206(4)-8 makes it a fraudulent act for any adviser to a pooled investment vehicle to make an untrue statement of material fact, or a misleading omission, to any investor or prospective investor in that vehicle.
Four provisions of the Marketing Rule shape what an operating record can claim when a registered adviser disseminates it.
Substantiation
Paragraph (a)(2) prohibits a material statement of fact that the adviser does not have a reasonable basis for believing it can substantiate on demand by the Commission. A sentence such as "led the company through its first reimbursement approval" is a statement of fact, and it needs a document behind it.
Case Studies
The adopting release states that case studies and similar information about the performance of portfolio companies are specific investment advice, subject to the fair-and-balanced requirement of paragraph (a)(5). Presenting only profitable investments when similar unprofitable ones exist would not be fair and balanced, and case studies that include performance information are also subject to the rule's performance requirements.
Extracted and Predecessor Performance
Once an operating story carries a return figure, it becomes performance. Paragraph (d)(5) bars extracted performance unless the total portfolio's results are provided or offered promptly. Paragraph (d)(7) bars predecessor performance unless the person or persons primarily responsible for the prior results manage accounts at the advertising adviser, the accounts are sufficiently similar, all substantially similar accounts are included (subject to a materiality exception), and the source is disclosed clearly and prominently.
Endorsements
The rule defines an endorsement as a statement by a person other than a current client, or other than a current investor in a private fund the adviser manages, that indicates approval of the adviser or describes that person's experience with it. A portfolio company chief executive's praise, when the adviser publishes it, fits that definition and brings the disclosure and oversight conditions of paragraph (b), subject to the exemptions in paragraph (b)(4).
Two adjacent standards complete the frame. Rule 204-2(a)(16) requires a registered adviser to keep the records necessary to form the basis for, or demonstrate the calculation of, any performance it presents. The 2020 GIPS Standards for Firms, provision 1.A.32, permit performance from a past firm to be linked to a new firm only if substantially all of the investment decision makers are employed by the new firm, the decision-making process remains substantially intact, the new firm has records to support the performance, and there is no break in the track record. Neither standard governs operating facts directly. Both express one principle: a claim travels with the people who made the decisions and the records that prove it.
03The Evidence Classes
Every claim in an operating record rests on one of five classes of evidence, which differ in who produced the document, under what liability, and how far an allocator can test it.
Class A: Public Filing
A document filed with a regulator under legal liability. A Form D lists, under Item 3, each executive officer and director of the issuer. A registrant's disclosure under Regulation S-K Item 401(e) describes each director's and executive officer's business experience over the past five years. Class A fixes names, titles and dates. It says nothing about contribution.
Class B: Governance Record
Board minutes, written consents, shareholder agreements, employment and engagement letters, produced from the company's own files. Class B shows decision rights: what a person was entitled to approve, what came before the board, and how the person voted.
Class C: Counterparty Reference
Statements gathered by the allocator from people who worked with the partner. The ILPA Due Diligence Questionnaire 2.0 asks sponsors for references at all portfolio companies in the last two predecessor funds, at least including the current chief executive and any chief executive displaced during the sponsor's ownership. Class C is the only class that reaches conduct under pressure.
Class D: Company Operating Data with a Baseline
Revenue, margin, regulatory milestones and headcount, measured before, during and after the partner's involvement. The ILPA questionnaire's investment-detail template asks for annual financial data from three years before the investment through the ownership period, together with a valuation bridge that separates operational improvement from multiple expansion and leverage. Class D establishes that something changed. It cannot establish who changed it.
Class E: Self-Authored Narrative
The biography, the case study and the presentation page. Class E is a claim, not evidence. It is useful as a map of what the sponsor wants to be judged on, and every sentence in it should resolve to a document in Classes A through D.
04What an Operating Record Supports and What It Does Not
The table below pairs each claim an operating record can carry with the adjacent claim it cannot carry, and names the evidence class that settles the first.
| What an operating record supports | What it does not support | Evidence class |
|---|---|---|
| The person held a named operating role at a named company for stated dates. | That the person caused the company's results during those dates. | A (Form D Item 3, S-K Item 401), confirmed by B |
| The person held decision rights over a defined function, such as a commercial launch, a quality system or a reimbursement strategy. | That every decision in that function was the person's own, particularly where a committee or a chief executive held final authority. | B (minutes, consents, engagement letters), corroborated by C |
| The person has worked through a specific operating event: a regulatory submission, a coverage decision, a plant remediation, a reduction in force. | That the experience transfers to a different modality, sector, stage or company size. | B and C |
| The person can influence a management team from a minority board seat. | That a minority investor can impose the changes an owner-operator or a control investor could impose. | B (shareholder agreement rights, minutes), C (current and displaced chief executives) |
| Company operating metrics moved during the person's involvement, measured against a pre-investment baseline. | Causation, or any return to investors. Adding a valuation or a multiple converts the account into performance, which carries the Marketing Rule's performance conditions. | D with a three-year baseline and a peer comparison |
| The person's conduct in a failure: a missed milestone, a covenant breach, a write-down. | That failures are absent. A record composed only of successes is a selected sample. | C and B; ILPA DDQ 2.0 question 14.5 asks for investments below 1.0x |
| Operating capacity exists inside the firm today, with named people and stated terms. | That the capacity is a firm resource at no cost to the portfolio, or that the people will remain. | B (engagement agreements, partnership expense terms); DDQ team templates |
| The person has relationships with clinicians, payers, customers and acquirers in a field. | That those relationships will convert into deal flow or exits for a new firm. | C |
| A case study shows what the sponsor chooses to emphasize. | Any fact not resolved to Classes A through D, or chosen only because the outcome was favorable. | E, tested against A to D |
05Attribution in a Minority Position
Attribution is the hardest row in the table, and it is harder for growth equity than for buyout. Growth equity is usually minority capital: the investor holds a board seat and negotiated protective rights, not control of the company's management. The ILPA questionnaire reflects this in question 4.15, which asks a sponsor to describe its preference for control, minority, joint or sole positions and the controls and rights it seeks. A minority investor's operating influence runs through persuasion, board process and the chief executive's willingness, so the operating record of a minority partner is necessarily a record of shared outcomes.
The SEC's treatment of predecessor performance supplies a useful discipline for these shared outcomes, even though it governs investment results rather than operating facts. The adopting release states that the "primarily responsible" condition requires advisers to focus on the role the individual played in producing the performance, including the extent of the person's decision-making authority or influence, and that where a committee made the decisions, a committee with a substantial identity of membership must carry the record forward.
Applied to an operating record, the test is concrete: for each outcome claimed, identify who held the decision right, what the Class B record shows about that person's role, and whether the people who did the work are the people now presenting it.
Three further questions separate a durable operating record from a curated one. First, what was the baseline? A margin that improved at the same rate as the sector's quoted peers is not evidence of operating contribution, which is why the deal-level research cited above measures performance relative to peers.
Second, what happened at the companies where the same person was present and the outcome was poor? The ILPA questionnaire asks for three to five investments below 1.0x and for a description of what went wrong, what action was taken, and how and when outside experts were brought in. Third, what do displaced chief executives say? A reference list limited to executives who stayed is a Class C sample with the dissent removed.
06The Cost Line and the Team Line
An operating record describes people, and two facts about those people belong in every evaluation: who pays them, and whether they are still there.
On cost, the SEC's Office of Compliance Inspections and Examinations reported in a June 23, 2020 risk alert that it had observed private fund advisers that did not adequately disclose the role and compensation of operating partners who are not adviser employees, potentially misleading investors about who would bear the cost of their services.
The ILPA Principles 3.0 address the same point from the investor side: where operating partners paid by portfolio companies are presented as members of the sponsor's team, limited partners should understand how they are compensated, and ILPA's position is that portfolio company fees paid for services by operating partners deemed affiliates of the sponsor should be fully offset against the management fee. An operating record presented without its cost terms is incomplete, because the same capability means something different when the portfolio pays for it.
On continuity, the ILPA questionnaire's glossary treats dedicated portfolio company operating partners who work closely alongside deal professionals as potential senior investment professionals, and its team templates ask for every departed member of leadership and senior investment staff over the past five years, including the investments each was responsible for as lead and non-lead. That template exists because a record belongs to the people who built it. When they leave, the record leaves with them, the same logic the GIPS portability conditions apply to investment results.
For founders, the same analysis runs in reverse. The useful questions are the allocator's questions: which board minutes would show the partner's role, which displaced executive would describe the partner's conduct, and whether the person who did the work will be the person in the boardroom.
07Frequently asked questions
Is an operating record the same as a track record?
No. A track record in the investment sense is a set of fund or deal cash flows. An operating record is a set of facts about roles, decision rights and conduct inside companies. It supports conclusions about capability and judgment, not about returns, and it becomes performance subject to the SEC Marketing Rule's performance conditions once return figures are attached to it.
How do allocators verify what an operating partner actually did?
They resolve each claim to a document. Public filings fix names, titles and dates; board minutes, consents and engagement letters show decision rights; references from current and displaced chief executives show conduct; and company operating data, measured against a pre-investment baseline and quoted peers, shows what changed. A sponsor's own case study is a claim to be tested against those sources.
Does the SEC Marketing Rule govern operating case studies?
For registered advisers, yes. The adopting release treats case studies about portfolio company performance as specific investment advice that must be presented in a fair and balanced manner, and case studies that include performance information are also subject to the rule's performance requirements. Every material statement of fact in them must be one the adviser has a reasonable basis to believe it can substantiate on demand.
Nothing in this piece is investment, legal, tax or accounting advice, and nothing in it is an offer to sell or a solicitation of an offer to buy any security.
Former Chairman of JumpStart Inc. He has founded, scaled and exited companies across media, nutrition, real estate and human-resources technology, and owned the revenue line in every one of them. What he brings to a position is that operating experience at scale, investment acumen, an advanced diligence capability, and technology and artificial-intelligence expertise. He invests the way he operated: inside the business, on the plan, alongside the management team.