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The Financial Director interview – Other people’s business

Meet the boss. As finance director of 3i Group plc, the largest venture capital business in Europe, Michael Queen is naturally interested in the health and welfare of the 2,300 or so companies in which his funds have invested – aside from anything else he’s on the investment and valuations committees. So for perhaps hundreds of readers of this article whose businesses have been backed by 3i, Queen is a very important person to be on the right side of: any decision to provide further major funding – or to sell out – may well be in his hands.

Moreover, Queen and his board colleagues are certainly even more demanding than are his own institutional shareholders. “The scrutiny and challenge that an executive board faces from a venture capitalist is much more direct than you get in a FTSE-100 company,” says Queen. “These people have very clear milestones, very clear objectives, and they are measured against that. That’s very liberating for people who can clearly see that’s the right way forward for the business.” Liberating, perhaps – but by no means laissez-faire: “For every investment we make, there is a value-creation strategy. We’re not simply relying on the incumbent management team to (wait and) see what happens. There is a very clear strategy for value-creation.” One company of which Queen is particularly proud is the oil services group John Wood, in which 3i has had an investment for 18 years: “Every year the management kept on putting forward a plan that said, ‘We can do this …’ – and it looked very good. They’ve achieved an IPO and we’ve still got shares.”

Obviously most businesses in the huge portfolio will escape Queen’s own eagle eye – by the time a major investment decision reaches the investment committee it’s already been on the receiving end of some very thorough market research and due diligence – so what is Queen’s input? “It’s a combination of things,” he says. First, to ensure the investment fits in with 3i’s investment strategy. “If at a strategic level we’re concerned the economy is going to have a negative impact on that sector, then we’d probably want more stress-testing of that business – how will it cope with a downturn?” But mostly it’s simply to bring to bear the collective wisdom of the executive directors who comprise the investment committee (though even with 16 years’ venture capital experience, Queen is the junior on the team). “All of us have been through a number of economic and investment cycles” – and that, he says, makes them much more sceptical when, for example, a business proposal for a commodity-based business contains the phrase “This time it’s different!”

Risk is the watchword but, as Queen points out, “We’re in business to take risk. It also means that a number of our investments fail. And quite often, one of the roles of the investment committee is to encourage our people to take more risk. Quite often what we (say) is, ‘Instead of putting £20m into that business, why not put in £30m and structure the deal in that way?'”

Queen also has to look after the running of 3i’s finances, not just worry about other people’s businesses. He has the usual finance function and general management responsibilities – and credits his heads of tax, treasury and financial control with being “much better at those roles than I would ever be”. He’s also responsible for driving strategy and planning, and for “coming up with 3i’s economic view of the world” – an “interesting challenge” given that 3i chairman Baroness (Sarah) Hogg is an economist by background and the former head of prime minister John Major’s policy unit. Queen also has a chief executive, Brian Larcombe, who used to be 3i’s FD. So does Larcombe try to tell Queen how to do his job? “No, he doesn’t actually. He’s very good. I think he’d had plenty of time doing the FD’s job.”

While Queen more or less introduced himself to us with the words “The first thing I would say is I am a chartered accountant”, he immediately added, “but really I am a venture capitalist.” The CV bears that out.

Having left Coopers & Lybrand almost immediately after qualifying, he joined 3i’s Leeds office and started investing in local businesses. After opening and running an office in Hull, he moved to London in 1990: “I got here just as the recession was starting,” he recalls. “It was a fantastic experience, to see how many companies you can save and how many go to the wall. It was a tough environment.”

Then came a move that seems about as far away from venture capital as you can get – a two-year secondment to HM Treasury to work on an assignment for the National Health Service. But the project in question was the NHS’s private finance initiative: “I built up a team, put the structures in place, and that was fascinating,” he says with real passion. “The NHS hadn’t got a very good track record of building things to time or cost, and therefore the private finance initiative wasn’t just about the money, it was about a new way of building and procuring hospitals. It was in many ways quite a humbling experience because I was working with a lot of people in the finance functions in the hospitals who do a tremendous job, get very little recognition for what they do but were hugely committed to improving the NHS. And a lot of the hospitals we have today were started back in that era, so it gives me huge satisfaction to think that all the people I worked with ultimately went on and actually made it happen. That was a great period.”

On his return to 3i, Queen was asked to put the finance function experience he’d garnered at the NHS to good use by becoming group financial controller to reorganise the company’s finance department: the administration centre in the West Midlands was becoming divorced from the main culture of the business. Now, staff from the centre spend time in the business units in the UK and internationally. “We operate a hub-and-spoke system of finance function, and it was just making sure that the balance between the hub and the spokes was right,” Queen explains.

Within 18 months, Queen was asked to fill the vacancy created when Brian Larcombe became chief exec. Larcombe has brought about some remarkable cultural shifts. The business was originally called ICFC (Industrial and Commercial Finance Corporation) when it was created in 1945 by the main clearing banks and the Bank of England. It was, arguably, a political vehicle: as the risk-capital arm of the banks it effectively took on the role of “the acceptable face of capitalism”. Renamed Investors in Industry, hence 3i, in the 1980s and floated by the banks onto the stock exchange in 1994, it took until the late-1990s for the business to shed much of its strategic baggage. Investment horizons have shrunk considerably, for example, and 3i has spread into continental Europe (where it is the leading player in many countries), the US (with offices on both coasts) and a small presence in the Far East.

The most significant change, however, is that 3i isn’t the passive investor that it used to be, and it picks its products and industry sectors with more care. “What we are trying to be is an added-value investor,” says Queen. “We look at a business proposition and say, ‘What can we and the management team of that business do to really create value over the next few years?’ So for every investment we make there is a value-creation agenda. That may mean we need to upskill the management team of those businesses. It may mean freeing the business from capital constraints, allowing it to invest in new processes, new products, or make acquisitions.

But there is a clear value agenda for these businesses.” A phrase like “upskill the management team” certainly sounds like a euphemism for “sacking”, and indeed Queen isn’t squeamish on this point. “If we’re investing in a business that’s a turnaround, a key reason for that business needing to be turned around may be the incumbent management team. That’s the most common reason for a business underperforming or failing. If you duck those people decisions the situation only gets worse.” But there’s more to it than that. It might simply be that certain skills are lacking because the proposal is for a management buyout, but the subsidiary has been relying on certain group head office skills, and so has no marketing director, for example. A common problem in such deals, though, is that the “FD” in the buyout team is often doing “a good financial controller’s job, but not really adding value strategically in this business”, Queen says. Even that doesn’t mean that he will automatically be replaced, though.

3i almost invariably appoints a chairman for the companies in which it invests and could, in such a situation, choose one with a career history in finance, perhaps even as an FD. “What that chairman can then do is effectively mentor the finance guy. Over a six month or twelve month period we can see whether he’s got (the necessary) capability. If he hasn’t we need to change it, but if he has, that’s the best way of bringing him on.”

Queen says that the deal of which he is perhaps most proud was Go, the budget airline that 3i acquired from British Airways and then sold to easyJet less than a year later for an £86m capital gain. But aside from the amount of money that 3i made, the Go deal demonstrated more than any other the change in culture at the venture capital firm. 3i had built up a lot of expertise in the airline industry over the years, knew the aviation sector well and understood the regulatory issues. So when BA decided that the time was right to sell its fledgling operator, 3i was well positioned with industry knowledge and the necessary balance sheet to put together the management buyout package. When easyJet approached 3i 11 months later and offered to buy Go, the price on offer was simply too good to resist – even though it scuppered Go’s management’s plans for an IPO. “The combined easyJet-Go is a stronger business,” says Queen.

“Easyjet got a lot out of that deal. We got a lot out of that deal. The management made an awful lot of money in a very short time. It was a very, very good deal. And because it got a lot of publicity at the time, it brought into sharp relief this change of style that we’d been driving through the business for quite some time.”

But that change in style resulted in what must have felt to the management like a hostile takeover bid. “Except that we owned the business,” Queen reminds us. “If you’ve got 75% of the equity or something like that, then we’re going to act responsibly as an owner of that business. We’d agreed an operational and a value-management agenda for that business (with the management). In a way, Go was a victim of its own success. EasyJet put on the table what we thought we would make if we held that business for three years. Commercially, in terms of our own shareholders, it was absolutely the right thing to do.”

What about putting aside the management of other people’s business and managing his own? “Am I going to ever do a start-up and run a new business?

Well, maybe – but as each year passes the odds get smaller. When you’re working with entrepreneurs you realise just how hard it really is to actually start up a new business idea from scratch and take that forward. But I would say you can get the same entrepreneurial buzz from running a business like this. I suspect I’m never going to do a start-up, but I would love to.”


Name: Michael Queen
Age: 41
Qualifications: FCA
1997-: 3i Group, finance director and member of the group investment committee
1996-1997: 3i Group, financial controller
1990-1994: Secondment to HM Treasury/NHS
1994-1996: 3i Group, director, London
1987-1990: 3i Group, Yorkshire region
1983-1987: Coopers & Lybrand

Biggest challenge in your job?
Ensuring that the stockmarket and our shareholders fully understand the nature of this business and the real value of this business.
Biggest hassle?
I’m all for good corporate governance, but when it’s just box-ticking, that’s very irritating.
What other company would you like to be FD of?
Hopefully my next job will be chief executive somewhere else. The NHS would be the most challenging FD role.

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