Common ground FRP Transition How PE funds and interim directors like to work together
Introduction
“This report aims to bridge a gap in
Every day, I connect highly experienced interim managers with private equity funds seeking their skills. And I regularly find gaps in understanding from both parties about how the other likes to work. This report aims to bridge this gap, and, by doing so, support stronger relationships and better outcomes for the portfolio businesses involved. Here, we reveal interims’ and PE funds’ preferences for engagement at three key stages of their partnerships, based on a quantitative survey of 84 current or former interim managers and interviews I conducted with 6 decisionmakers at UK private equity houses. I hope the results spark thought, and, more importantly, prove useful in practice. If you would like to discuss any of the issues raised, please do get in touch.
understanding, and, by doing so, support stronger relationships and better outcomes.”
Susan Moor Director FRP Transition London +44(0)7787 124 626 susan.moor@frpadvisory.com
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How do interims like initial conversations to go?
The process of engaging an interim usually starts with the PE fund providing some background information prior to a first conversation. 78% 46%
The FRP view
The key points that interims want a PE fund to provide – assuming no NDA is in place – are details on the performance of the business (78%), the objective of the turnaround (65%) and information on the company and its market (45%). Funds generally won’t start any conversation unless they have an NDA in place. However, once one is signed, funds told us they are likely to provide what interims are looking for – details about any issues with the business, its financial situation and background on the current management team. Once background information has been shared, interims and a fund will then meet. This is an opportunity to discuss the objectives and circumstances of the project in more detail, but also for the interim to start to ‘sell’ their skills.
In early stages of any interim engagement, there needs to be real openness and honesty from both sides of the table. It’s encouraging to hear that, provided an NDA is in place, PE funds are happy to provide the key information that interims are seeking. And it’s perhaps not surprising that performance is the key issue where interims want detail. When it comes to performance, it’s essential that PE funds are candid, right from the start, about the problems they see. Without this, it will be difficult for either side of the table to understand if they are the right fit. The fact that interims generally choose to emphasise their situational experience over any sector-experience reflects the value that interims most often offer PE partners. While a portfolio business’ management team will, in most cases, have strong sector knowledge, what they might be lacking are the skills to deal with specific circumstances or situations that the business has encountered. It’s these skills that PE fund wants to bring on board, and what an interim needs to show they offer. In the first meeting, they need to listen carefully, and then align their experience closely with the case.
When doing so, interims are most likely to focus on presenting their situational capabilities (46%) over any specific sector experience (38%) to their prospective PE partner. They might also mention PE funds they’ve worked with in the past – something 88% said they felt improved their standing with a potential new fund partner. Most interims tend to work with a close- knit network of one to four PE funds (73%).
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How can PE funds best introduce interims into a live environment? Once an interim is appointed, an initial challenge a PE fund has to navigate is how they’re introduced to the business. This will vary in difficulty depending on the circumstances of their appointment – in some cases, an interim can be seen as an ally, but in others they might encounter a management team that views them as a threat. When we asked interims how PE funds could support a good introduction, the top answer was funds emphasising their credibility (37%), with just over a fifth (21%) stressing the importance of engaging senior leaders.
The FRP view
How the fund introduces an interim can have significant bearing on the success of their appointment. Some management teams will be suspicious of outside influence, others will embrace help with open arms. In every case, it’s critical that PE funds show that they’re confident in the appointment and communicate the value and experience that the interim brings. Funds might even be able to get management teams on board with the interim’s credibility early by involving them in the interim search process. While this won’t always be appropriate, I’ve seen instances where PE funds have narrowed down a shortlist of candidates that they’re comfortable with, and then sought the existing management team’s input on who they see as the best fit – naturally gathering support behind the interim when they take up post. Another important thing that funds said they wanted to prioritise when making interim introductions was empathy – a factor echoed by the interims we polled. Ultimately, any interaction needs to be respectful of, and accommodating to, the people involved at what could be a very challenging time.
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How to do interims want to work with PE funds over the appointment’s lifespan?
Once a project is up and running, interims seek a ‘happy medium’ when it comes to contact with the PE fund, far preferring weekly catch-ups or ones every other week (38%) to twice-weekly (7%) or even mothly (22%) meetings. Of course, the ‘ideal’ frequency of contact is likely to vary over the course of the relationship. In distressed situations, many of the PE firms we spoke to said that they’d want frequent weekly reporting catch-ups in the early stages of the appointment, ideally face-to-face, but would be happy to relax this as the appointment progresses. When it comes to setting-up the parameters of the appointment, the majority of interims seek a collaborative partnership with PE funds. Nearly nine in ten (88%) want to work with the fund to set KPI and reporting metrics – which PE funds tell us they are happy to do at an early stage – and a similar proportion (87%) see it as a joint responsibility to find the interim’s successor once their role is done. However, there are areas where interims are far more likely to seek autonomy. When it comes to day-to-day decision making, they prefer a PE fund to remain in the background but to be supportive of their decision (14%) and believe that a PE partner should be aware of, but in the backseat for, any decision about fundamental changes to a management team (63%). Broadly, face-to-face contact is preferred (18%), although many interims are happy to submit regular written reports (15%).
The FRP view
The over-riding message here is that interims want to be trusted to get on with the job. This reflects our experience. However, interims need to respect the PE firm’s own position and its responsibility for its portfolio company. The best relationships work in a way that allows the interim to apply their skills with discretion while also ensuring the PE backer never feels out of the loop on progress. It’s encouraging to see interims recognise that they have a role to play in appointing their successor once their work is done. We often find that a business’ management teams don’t always have the skills to find and interview candidates for these roles themselves, and this is a final point where an interim can really add value. Ultimately, they’re not trying to find a replacement for themselves – they’re looking for someone with the right skills to execute on the next stage of the business’ strategy. As the person often responsible for setting the firm on this path to growth, they know intimately what, and who, is most likely to help the business succeed. It’s also considerate behaviour that rounds off the appointment on a good note, helping their chances of re-appointment in the future.
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Closing thoughts Every party enters an interim appointment wanting it to succeed, whatever the objective is. A good understanding of how each other – interim and PE fund – like to work only strengthens this chance of success. As well as accounting for the factors we’ve explored here, the most important ingredient for a good working relationship and a good outcome is honesty. Interims need to be honest if they feel their skillsets aren’t the right fit, and if they’re concerned that the appointment won’t meet the PE fund’s objectives. And funds need to be clear about the challenges that a business might be facing, and be realistic with the interim about how their plans with the business are evolving; there needs to be an acknowledgement if Plans B and C are on the table when an interim has been tasked with Plan A. At FRP Transition, we match interims with funds to deliver continuity during periods of change. A big part of this process involves making sure each party is on the same page with their preferences and goals – all in the service of finding the right person for the circumstances at hand. Please do get in touch if you’d like to learn more about how we could support you.
Susan Moor Director FRP Transition London +44(0)7787 124 626 susan.moor@frpadvisory.com
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October 2024
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