Over the last twelve months, private equity firms’ hires of operating partners have been widely publicised. There is no doubt that these hires provide investors with invaluable operating insight. But who are the executives being deployed behind the scenes to deliver on the objectives identified by GPs and operating partners? Welcome to the much-changed world of interim executives.
If good venture capital and private equity investing is about backing winning management teams, does the increasingly widespread injection of interim executive talent into portfolio companies across Europe amount to an admission of failure by the venture capital and private equity industry? The short answer is a resounding ‘no.’ On the contrary, it means that the industry has come of age and has entered a new stage in its evolution.
Venture capital and private equity firms are now frequently deploying interim executives for the companies in their investment portfolios, not in order to replace the incumbent management team, but to work alongside it. Interims are being utilised at pivotal points across the entire investment cycle; for example: when an investment opportunity is being investigated or fully due diligenced, they provide sector-specific expertise and impartiality; they carry out projects that will reignite the portfolio company’s growth at several points in its evolution; they contribute to a profitable exit by the investor, in the year or so preceding trade sale or flotation.
The increasing use of interim executive talent by venture capital and private equity investors demonstrates that as the industry has matured, investment directors have become far more operationally involved, in order to extract the desired rate of return from portfolio companies. Interims selected to deliver on identified objectives have proved to be an extremely successful instrument of venture capital and private equity firms’ operational involvement.
No management team, however capable, can ever be the best management team that a portfolio company could have at every single stage in its evolution. By this I mean that one management team cannot possess every one of the skills and insights to best address every market situation and every industry condition that will arise as markets and industries evolve. But a winning management team can steer a company through the most disruptive industry-wide changes, by availing itself of additional management talent to address smaller and greater issues as they occur.
One of the most valuable qualities in top management is its ability to recognise when it should avail itself of external assistance. The value added by the presence of a venture capital or private equity firm on the Board of a portfolio company is demonstrated, amongst other things, by assisting the incumbent management in recognising when such pivotal points are being reached, and in helping it secure the additional management expertise needed at that point in time and temporarily, to deliver on the newly identified objectives and tasks.
The growth of the interim executive market in the UK has made it possible for venture capital and private equity firms to secure the perfect match for the requirements of each specific situation, through the services of specialist interim management providers. In addition to bringing to bear a highly specialised skills set, and years of senior management experience, interim executives approach each situation with impartiality. All together, these attributes render them uniquely effective to deliver on the objectives set by the management and investors in portfolio companies.
Examples of assignments will illustrate best the most common ways in which interims help private equity firms, from the beginning to the end of the investment cycle, to achieve the desired return from their investments.
· Impartial opinion on an industry and its players
A senior interim executive with, typically, decades of experience of the specific sector in which the private equity firm is investigating an opportunity, is asked to distil his/her knowledge of the sector and its players, for formal presentation to, and discussion with, the investment team. The interim brings insights that can make all the difference to the decision of whether to progress with a bid and with due diligence, and to the scoping of any eventual due diligence exercise. The same individual may be asked to assist with commercial due diligence.
· Commercial due diligence
A senior interim with several years of sector-specific management experience assists the private equity firm with commercial due diligence of a potential investment. The private equity firm might ask for a candidate who would be ready to step into an interim or permanent CEO role in the event of the investment being made and the management situation requiring it. In any event, post-acquisition the same professional may be asked to assist the investor with a further in-depth review of the company and with drawing up the “first hundred days” plan.
· Marketing / Corporate strategy
There are junctions at which a company’s marketing and corporate strategy become so intricately linked, that “getting it right” will determine the entire company’s success. In these cases, a top-calibre interim with in-depth knowledge of the sector’s dynamics, of its past and forecast evolution and of the challenges facing it and its players, can assist the Board with reaching major strategic decisions. Typically, he/she will produce a strategic review and propose the range of strategic options available to the Board, each with its respective implications. The search may be for a candidate who would be willing to “underwrite” his recommendations by also taking on a non-executive director role, to see the company through the agreed strategy.
· Area-specific projects
These projects arise where the private equity investors have identified a specific area for intervention at the portfolio company and, together with the rest of the Board, determine to address the issue through the injection of the necessary specialist skills for the duration of the project.
For example, a retail sector player with problems traceable to its purchasing decisions may decide to appoint an interim specialised in the Purchasing area, to carry out a review of the people and practices currently governing the purchasing department, and to recommend improvements. Remedying the problem may include mentoring the incumbent Purchasing team; if the latter needs to be replaced, the interim can help the company hire and train a new team.
· Preparation to exit
Typically a year prior to exit, private equity firms review and map the path necessary to achieve the most successful divestment. In that process, they identify areas in which the company’s management will require temporary additional management resources to carry out tasks of which the incumbents might have had no prior experience (e.g. communication with the public markets, if a flotation is envisaged), or which they would not have the time to carry out without being distracted from the day-to-day running of the business.
A typical assignment would see a highly experienced interim finance professional being deployed alongside the incumbent CFO, to review the portfolio company’s management information and to provide the private equity firm with a higher degree of transparency with respect to cash-flow and profitability by product line, production facility, etc. This information will help the investor and its advisers to identify the most appropriate buyer and may well determine whether the highest return will be achieved by selling the company as a whole or in parts.
Turnarounds are another area in which interim managers are deployed by venture capital and private equity firms. Every firm would like to hold a track record of 100 per cent investment successes, but it is a fact that some management teams will fall well short of expectations. In such cases, interim turnaround specialists have proved to be highly effective agents of change. These are CEOs and CFOs – indeed, often a team of professionals who have repeatedly worked together – who already have a string of successful turnarounds to their credit.
Typically, they possess a highly analytical and practical approach to strategy, they are “driven” and decisive individuals, and can adapt their personal management style to suit the requirements of each situation. They are motivated by the challenge of taking a company back into the black, and having delivered on that objective they will be keen to apply their skills to the next challenge.
Where a private equity firm is weighing up the merits of a permanent or an interim replacement to a CEO (or to the CEO and CFO team) to lead a turnaround, the interim route offers two distinct benefits: a suitable candidate who is currently CEO of another company often will not risk leaving his current permanent position in order to take up an equivalent one at a company in serious difficulties, where there is a risk that (as investors know can occur) the extent of the true difficulties facing the company might be uncovered only when a new CEO steps in; also, turnaround specialists can step into the breach and be effective from day one, since they have learnt from experience how to “hit the ground running”.
Two other current uses of interim executives by private equity firms are worthy of mention, namely: the deployment of interims in Central and Eastern Europe; and that of UK-based interims specifically for US-based investors across Europe.
· Central and Eastern Europe
The calibre of local management in the region is now very high – individuals with preconceptions to the contrary need not apply! Interims are being used there to carry out all types of assignments, but also to transfer highly sector-specific world-class know-how to the local managers. Generally, the incumbents’ objective is for their company to succeed by pursuing a strategy of clear differentiation, by adopting concepts tried and tested in other markets, and/or by offering a higher quality of service achieved by means of state-of-the-art operational processes and procedures.
Many of the interims who for years now have been carrying out roles in Central and Eastern Europe are UK-based because of the healthy evolution of the interim management market in the UK, as opposed to that of other European markets (the Netherlands representing a notable exception) which have suffered from more inflexible employment legislation.
· UK-based interims for US firms’ European investments
For US-based investors, UK-based interims constitute an ideal resource for deployment at portfolio companies (and subsidiaries) not only in the UK but across the whole of Europe. The pool of interim managers in the UK is known to be so highly developed that investors can be confident of a specialist interim management provider being able to identify the perfect match for their particular situation. The pool includes interim managers with experience of working both for US companies and across Europe, with the result that their effectiveness is greatly enhanced by being able to act as highly successful bridges between the respective cultures of US shareholders and European investee companies.
A common misperception among firms that have rarely deployed interim executives in portfolio companies is that they must be a useful resource only in the event of an incumbent needing to be replaced outright, as in a turnaround or classic gap management (e.g. unexpected critical illness) situation, or as a last resort in the event of an incumbent proving to be incompetent.
Two factors underlie this misperception: insufficient awareness of the extent to which the interim executive market has evolved and, therefore, of the depth of flexible resourcing options it affords; and the belief that the injection of interim management talent at the private equity investor’s behest will provoke a negative and counter-productive response on the part of the incumbent management.
The risk highlighted in this second consideration must be evaluated and taken fully into account. For rather than precluding the use of the extra skills needed by the portfolio company at that specific time, it will indicate the best way to overcome management’s potential defensiveness and to realign its objectives with those of the investors. It will also determine the set of soft skills that the interim candidate should possess, to be effective in that company’s particular set of circumstances. A specialist interim recruitment consultant with first-hand experience of venture capital and private equity will understand all these issues and be able to identify the interim professionals most suitable for these roles.
Interim executives have already amply proved their worth for venture capital and private equity investors. A high proportion of firms have deployed them in turnaround and gap management situations, and the use of interim executives’ skills for these purposes will continue. In recent years, venture capital and private equity firms have also discovered the merits of injecting interim executives’ highly specialised skills-set into portfolio companies at many other points in the investment cycle, as an extremely effective and flexible resource for delivering on their objectives.
As an increasing number of venture capital and private equity firms become aware of the depth and quality of the UK interim management market, the utilisation of interims for project-based work, ranging from commercial due diligence to preparation for exit, will rise sharply.
Valeria Vescina heads up the Private Equity Practice at Ashton Penney, a UK-based interim management provider. She can be contacted at email@example.com.