The overriding, ever present recurring theme of PE fund managers is dealflow. What keeps a PE fund manager up at night? Dealflow. What gets a them up in the morning? More deals. What drives them to stay connected and answer the phone while on vacation? That would be more deals.
And dealflow’s brother is price. As dealflow becomes more pressured and harder to come by, prices of companies go up. And seemingly everything gets shopped since fund after fund are grabbing for the same opportunities.
Proprietary access to deals is the holy grail. Into this challenge, how does a professional investor win, if you can’t even get to the start line?
Many private equity funds hear the words “interim executive” and think the only application is turnaround or short-term fill-in. But for PE funds seeking a great return, they look to interims for their unique abilities to build and transform companies.
Here are six major use cases for interim executives in PE-owned portfolio companies:
Interim Executives in Diligence
Most funds hope to spread their wings – work beyond industries where they’ve already had success, by looking at new industries where acquisitions may cost less and produce higher returns. The further afield they go, the more they need expert leadership removed from prior operating teams.
According to a Harvard Business Review report, the failure rate for mergers and acquisitions sits between 70 and 90%. Even before the deal closes, it’s not uncommon for deals to unravel.
If the odds can be overwhelmingly negative, what can you do to increase your chance of success if you are looking to sell your business?
Don’t wait for the M&A process to begin to get your team in gear – that’s a sure fire way to fail.
The best private equity funds talk about backing great CEOs, entrepreneurs, and management teams. But in the lower middle market ($2-$15 million in EBITDA), what’s a private equity fund to do when the company they are acquiring lacks resources and the management skills to earn great returns?
What if serious talent doesn’t extend beyond the CEO or founder?
Douglas Song, co-founder of Prodos Capital Management and an investor in lower middle market companies, says that “there’s always a way to think creatively and unlock value in any lower middle market company.” He especially finds common themes among companies where entrepreneurs or families have built a great business over time, but are lacking in certain areas where partnering with additional resources will help them take the business to the next level.
“No duty the executive had to perform was so trying as to put the right man in the right place.” -Thomas Jefferson
Private equity fund managers aren’t in the caretaking business. They are in the business of sparking change within companies that can be grown or turned around to produce big returns for their institutional investors. And that change can’t be just incremental. Fund managers strive to be in the business of transformation.
Sometimes, along with capital, transformation means bringing in solid, experienced leadership to help take a company to the next level.
Interim executives benefit companies dramatically: high-level expertise drops in quickly to do the tough jobs — powerfully and without bias or politicking — to help a company improve. Soon after, they ride off into the sunset to the next assignment. Think of an interim executive as a modern-day John Wayne without the cowboy hat.
Mark Sullivan, founder of Lineage Capital Investment, knows how it works. His private equity firm recently dropped an interim CFO into a manufacturing business amid a turnaround. Monetary villains — so to speak — threatened the corporate ranch and outside help was essential to clean out the threat.
PE investment seemed poised for a spike in 2013, but Pitchbook’s 3Q 2013 Private Equity Breakdown spells out how that hasn’t happened, at least so far this year.
“While public equity markets experienced strong gains throughout the first half of 2013, PE deal-making was at a lackluster pace in 2Q 2013, reaching a new quarterly low since the depths of the financial crisis,” Pitchbook reports. PE firms invested $71 billion across 318 deals in the second quarter, down from the 420 investments in 1Q 2013 and far off the 671 investments in 4Q 2012, where late-year activity saw $141 billion in investments.
Meantime, exits saw a “slight uptick” in the third quarter– 108 portfolio company exits totaling $17.1 billion–but that activity was still the second lowest quarterly total in the last three years.
As the summer movie season begins, last summer’s romantic comedy, Celeste and Jesse Forever, is worth remembering. While it has absolutely nothing to do with interim executives, the story behind the movie’s creation spotlights a practice that is critical for interims.
First, a quick look at the movie’s backstory:
Last August, a New York Times article, Breaking the Mold by Writing a Part for Herself, spelled out how actress Rashida Jones wrote herself into Celeste and Jesse Forever.
Also one of the movie’s two screenwriters, Jones knew that directors tended to see her in roles where she was the pleasant counterpart (girlfriend/wife/friend). But the character of Celeste isn’t that person, and Jones wanted that role for herself.
One studio that considered purchasing the script wanted to reserve the right to cast someone else if finances dictated. She said no. Ultimately, the film was made in 23 days for less than $1 million.
The other day I met my son Will for a burger in Madison. Where to go but the Nitty Gritty, the bar and grill famous for its free birthday drinks (and for its longtime owner and chief greeter, Marsh Shapiro, who died late last year)? I arrived first, ordered a diet drink, and found that Will was still a few minutes away. So I hatched a plan that depended on a quick consultation with a conspirator.
Will arrived to find my diet drink had a balloon tied to it, and my name was on the greeter board.
(This is the board that the bartenders normally use to proclaim a lucky child’s entree into the adult world. I had arranged for a five-minute interval of youth.)
Will looks at the balloon, the board, and me. “What’s going on?” he asks. It’s a question I anticipated, and I gave the only possible answer.
Turning a quick profit is always music to an investor’s ear. But sometimes, patiently sitting through the entire symphony, so to speak, can result in a particularly satisfying ending. An investor’s proverbial “Ode to Joy” that requires waiting until the final movement of Beethoven’s 9th.
Steve Vivian is an investor with a platform that puts a twist on the traditional PE stance, including relaxing the traditional timeframe for realizing profit. With 15 years behind him in the world of private equity, Vivian recently launched Kestrel Capital Group with partner Bill Harlan.