Six months ago, Simon Borrows was the new guy at London's most venerable listed private equity firm, 3i Group plc, joining as chief investment officer after stepping down as chairman of investment bank Greenhill & Co. International LLP.
On Thursday, May 17, he took over as CEO, taking the reins from Michael Queen, who stepped down from the post citing the concern that shareholder frustration with the company's short-term performance was "likely to become personalized."
Queen's view was that he should not "risk 3i's good name and prospects being tarnished by unhelpful agitation." He said he had therefore concluded that "a change of leadership would be the most effective way to create the time and space to help the business achieve its full potential."
Borrows has already shown he plans to use the limited time and space thus created to take the company in hand.
"I've taken a grip on the investment committee," he said. "I've made it clear where I think our strengths are, and the prices and structures of deals that would be attractive in this market. We've made four new investments since I got here, but a number of other things have come forward, and I've been more cautious and said no to them."
More generally, Borrows said he divides what needs to be done at 3i into four "buckets." Control over the investment decisions falls squarely into the first bucket: improving investment management and strategy from the point of investment, through management of the companies in the portfolio to the final exit. That is as much about making fewer mistakes as about improving the capabilities of the investment team.
Work on the second bucket is less advanced. It's about asking more fundamental questions about the firm's businesses, especially its private equity business. Is the network too ambitious? Would the firm do better with a tighter focus on those geographies where it has a demonstrable track record and a competitive edge -- and if so, how best to wind down elsewhere?
"I have my views on that," said Borrows, indicating that he's very positive about Brazil for instance, but has questions about other emerging markets. "I haven't done the granular exercise to verify those views. That's what I'm going to be doing over the next month or two."
There is also a lot of work to be done on winding down poor legacy investments in places such as Spain, where the challenge will be to exit smoothly but not so fast that value is destroyed.
The third bucket is about costs and financial management at 3i itself. Referring to his time at Greenhill, Borrows, 53, said he believes back-office costs can be significantly reduced to reflect the kind of efficiencies he became used to as an investment banker. "When we designed and built Greenhill, we built it with a very lean infrastructure," Borrows said. I can bring some of that thinking here, and that will have an impact on our cost base."
The fourth bucket of tasks is in the area where 3i almost came unstuck in the financial crisis -- the firm's debt burden. Queen did a big job in reducing debt in the company to a level that is less life-threatening. But Borrows thinks there is much more work to be done.
"We have gross debt of £1.6 billion [$2.5 billion] and £1.6 billion of liquidity, a lot of it cash," he said. "We earn nothing on the cash, and we pay over £90 million of interest on the debt. I want to make a meaningful hole in that to get the interest bill down, because it's another drag on our returns to shareholders."
Cutting costs is all very well, but like any other business, 3i has to increase revenues as well as become more efficient. How does Borrows plan to get those revenues flowing? He is keen, he said, to expand the infrastructure and debt management arms of the company, which have grown in importance as the second and third legs of the firm's activities in recent years. The debt management unit in particular already makes £30 million a year in fees and is "capable of scaling up that business considerably," according to Borrows.
What the four buckets do not directly address is how much 3i plans to return to shareholders, particularly after the attack, earlier this year, by activist hedge fund Laxey Partners Ltd., which demanded 3i freeze investments, sell off assets and return cash to investors.
For this Borrows has a clear answer. He will not be freezing investments until the shares stop trading at a discount to net asset value nor will he put the firm into run-off. He believes the majority of shareholders support the firm's position on that and will vote in favor of the changes it will propose at the annual general meeting of shareholders scheduled for the end of June.
"We have to move fairly fast," he said. "We have to do a road show, and we will have to have more to say at the AGM. There's some work to do between now and then."