Private Equity Investors Tap Interim Executives to Transform Portfolio Companies

Private Equity Investors Tap Interim Executives to Transform Portfolio Companies

“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.

When Does an Interim Executive Make Sense?

“We look for situations where we can actually bring some operational expertise to the table,” explains Paul Pickard of Stewart Capital Management. “We look for a business where we know before we buy that we could do X, Y and Z to improve the operations of the company and get a return for our investors.”

Diligence, however, only reveals so much, and it’s not until a fund gets inside a company that they can really see what they have to work with. Often the legacy leadership does not have the right skillset, or needs guidance from a veteran exec alongside them to align with the fund’s vision of where the company can go.

Private equity funds tap interim executives to assess the health of an organization, create a plan, and execute. But why go with an interim over the seemingly more straightforward permanent hire? Interims say it starts with DNA.

Executives move into a career of interim management through (1) the corporate route – successfully completing mergers, acquisitions, spin offs, or turning around divisions of companies, or (2) the entrepreneurial route, building a company from the ground up to sale or IPO.

Interims are not wired like permanent execs, who sometimes get tunnel vision narrowing their focus on keeping the ship moving steadily forward. Interims by contrast bring about change and transformation that is designed to have a measurable impact on an organization.

A solid interim can make improvements to a company’s financial systems, marketing, operations, technology, or facilitate access to new markets, but there are a few common use cases in the world of private equity:

Technology or Systems Overhaul

Stewart Capital Management’s portfolio company had a great VP of information technology to run the day-to-day, but when it came time to upgrade systems, they wanted specialized help.

“You really want a CIO who has been there and done that across several different ERP implementations generally on the platform you are planning to do it on,” Pickard says.

This especially comes into play during mergers and acquisitions, where the portfolio company may be inheriting other technologies, platforms, cultures, and ways of doing things that need to be seamlessly integrated.

Sub-Par Financial Reporting

“The CFO is by far the biggest ‘no-regret’ move,” says Forest Wester, of TRIVEST, a $415 million Florida-based fund that works with many founder, family owned companies.

Often, a founder may be a terrific salesperson, engineer or inventor who has done a great job getting a company to a certain stage, but has trouble growing it further, or preparing it for a bigger sale, in part because adequate financial controls are not in place. Usually the existing bookkeeper, VP Finance or controller has never worked beyond the founder or family-owned environment, so needs guidance to start using best-in-class financial reporting.

“If you said, ‘Close the books faster, convert the financials to GAAP, and manage the debt structure’, their head might explode!” Wester says. “So we often bring in an interim CFO during the early stages of an investment.”

Sudden Executive Vacancies

Sometimes things happen that no one can foresee. A key executive could have a health crisis, a family emergency, or other matter that forces them to leave the job. A company may need to buy time to see if the executive will return. At other times, they need leadership while a search for a new executive takes place.

One thing that’s not an option: Leaving the seat unfilled for long.

“Because of Sarbanes-Oxley, public companies that lose a CFO or CEO feel a compelling need to fill the seat immediately,” explains Robert Jordan, CEO of the Association of Interim Executives. “Even private companies don’t have the luxury of letting the seat go vacant while they do a thorough search for a permanent replacement, which can take months.”

Rather than getting bogged down in the arduous 6 to 9-month permanent hiring process, Jordan says that “interim executives can jump in within days to lead a company, stabilize the situation, and ultimately help identify the next permanent leader.”

Outsourced Private Equity Operating Partner

While some PE funds have operating partners within the fund to find and assess potential investments or step into portfolio companies when needed, most funds are better served by outsourced resources including interim executives.

“The disadvantage many lower middle market and middle market funds have is that they simply don’t have enough internal funding to justify keeping a permanent bench of senior executives on high retainers,” Jordan says. “When leadership gaps arise or best practices need to be established across portfolio companies, funds are far better served by executive-as-a-service.”

About the Author

Olivia Wolak

Olivia Wolak co-founded the Association of Interim Executives and directs the organization. Olivia previously built the interimCEOinterimCFO network from a home-grown website to a robust social network with thousands of members. She directed publication of various ebook, website, and marketing initiatives and edited "How They Did It: Billion Dollar Insights from the Heart of America". In conjunction with the book Olivia led a national event series, the Entrepreneurial Bash, which drew hundreds of attendees and over 30 co-hosting organizations.