Views from private equity investors on interims in VC-

backed businesses

Five years ago, many venture capitalists had a negative perception of the use of the interim expert says
Cindy Thorneycroft, unit manager of 3i’s independent director programme. Today, that situation has
changed and the use of interim experts in private equity and venture capital-backed companies is
becoming increasingly popular.

Interims are More Established

Back then, the use of interims was less established and there was prejudice that the quality of
individuals acting as interims was in some way inferior to those of permanent executives. The
development of databases of high-quality executives by interim providers has helped change that
perception. “These are top people who choose to be interims rather than seek permanent positions,”
says Thorneycroft.

However, some venture capitalists are reluctant to publicise their use of interims. Graham Ransom,
head of venture marketing at VC house Interregnum, says that this may be due to worries that the use
of an interim is an admission that the VC backed company is failing in some way. Ransom dismisses
such concerns, arguing that by its nature venture capital investment involves constantly meeting new
challenges in the businesses it backs, whether that is under-performance or the need to beef up
specific areas of the company.

Interims Deliver Quick Results

More than other investors, venture capitalists are looking for quick results in the companies they own,
with a view to exiting the investment in three to five years. That means if an investment runs into
problems or if a senior executive steps down for any reason, venture capitalists need to find a skilled
chief executive, finance director or other senior manager as quickly as possible. Interims can fill the gap
almost immediately until the post is filled.

Risk is Not an Issue to Interims

Venture capital investment typically involves significant risk. It can be difficult to quickly attract a
permanent CEO, FD or sales and marketing director into this risky environment without the carrot of
some equity in the company. But often the equity is swallowed up at an earlier stage in the company’s
development. Using an interim who is less concerned with equity and risk and more on getting results,
provides the investors with that critical time period necessary to build and consolidate the business.

Interims Come with Broad Management Experience

In businesses still run by one or more of the founders, the management team is usually very strong on
the technical side but less so in terms of general management skills, says Mike Fell, Ex-Managing
Director of Granville Baird Capital Partners (now Baird Capital Partners Europe). In these situations,
interim managers can be an essential way of supplementing key leadership skills whilst implementing
much needed organisational change.

Ian McKinnon, an interim involved in an MBO, joined Alcan Aluminium in the early nineties as an interim
divisional managing director. “I was able to bring a lot more focus to the profitability of the company, as
I had come from the car industry where there had been a much greater culture of cost saving,” he says.
McKinnon remained at Alcan as an interim for three-and-a half years, before leading an MBO for the
company’s downstream business – now called the Luxfer Group – in 1995. At £210m, the deal was the
biggest MBO in the UK that year. At Luxfer McKinnon continued to use interim managers. For example,
when Luxfer purchased a gas cylinder manufacturer in Australia, owned by BOC, he used an interim
managing director who spent six months focusing on improving profitability.

Interim Providers Must Respond Fast

Many companies that attract VC investment are led by a visionary founder, but lack management
expertise in certain areas, says John Lowe, former managing director of Video Arts. He joined Video
Arts as a senior interim executive and ended up staying on to lead a management buy-out. At Video
Arts there was a key shortfall in the finance department during its MBO. Lowe contacted supplier BIE in
urgent need of an interim finance director and was supplied with the interim, Richard Gerlach, within
three days. The expertise Gerlach brought helped with the final stages of the MBO.

Responding quickly is critical in this demanding industry. As stated by David Rimmer, Director, Alchemy
Partners (Turnaround Professional of the Year (STP Award 2006)) “Unless the interim provider has a
bank of suitable candidates, already well known to them, there is no way that they can provide me with
the calibre of candidate that is even worth a first meeting given the timescales we are working to."

Conclusion

As the use of interim experts grows more popular, interim providers must develop and maintain a top
quality database of change experts to respond quickly and professionally to the needs of the
demanding private equity industry.

BIE©
May 2009