Private Equity - Portfolio CFO

The Covid-19 induced global economic decline presents a significant opportunity for private equity firms to find undervalued assets that have medium-long term competitive potential and the ability to yield higher returns. Many struggling companies will likely be available at discounted valuations as other investors seek an exit. Target companies will likely have high recurring revenues, and good cash flow to service their debt as sponsors take advantage of low-interest rates and increase the gearing of their portfolio companies. 

When a private equity firm invests in a company the objective is to improve the company’s operations, create long-term value and profitability, before seeking a viable exit at a multiple higher than their original investment. Often this necessitates a change of senior management and typically a new CFO is one of the first appointments. Research from Deloitte indicates that only 16% of CFOs continued their employment from the prior ownership and that the turnover rate of CFOs in PE-backed companies is high; in total, more than 80%. 

Financial point guard

The CFO is commonly seen as the crucial link between the portfolio company and the investment team. They should be a dynamic leader, able to preserve the health of the business whilst accelerating strategic development. The reporting relationship can be complex; some PE firms are very hands-on with the management of their investments, requiring regular updates from the CFO and playing an active role in decision making. However, in other instances the fund is comparatively hands-off, providing limited support, and leaving the operational management in the hands of their appointed leadership team. 

Under either scenario, PE firms seek CFOs that can be their financial point guard, stewarding day-to-day operations, instilling operational excellence, and supporting strategic decision making. The portfolio company CFO will need to balance both operational and strategic; it’s important to have a tight handle on financial reporting, but be conscious of how to catalyse growth objectives. 

Ideal attributes

Private equity firms hire CFOs that have a strong aptitude for robust governance and controls, yet possess the curiosity to become deeply entrenched in the business, to transform processes, provide strategic insight, and create value. A relationship of trust is crucial, with goal congruence front of mind. 

Candidates should demonstrate:

• High intellectual pedigree, equipped with critical and independent thought, be able to diagnose & solve problems and provide impartial advice

• Strong communication skills (both verbal and written), especially in terms of relationship building, sales, negotiation, and persuasion

• Emotional intelligence, including cross-cultural and interdisciplinary awareness, underpinned by resilience, and the ability to handle setbacks

• Digitally literate, aware of key technologies and their applications, to identify opportunities for automation. Strong data analytics skills and the ability to deep-dive into the financial and operating metrics of their business are critical to fine-tuning performance and making strategic improvements

Candidates should be able to demonstrate how they have succeeded in challenging environments. Knowledge of best practices from larger organisations can be beneficial but you will need to show how you can adapt to less established environments, take a hands-on approach, and display an entrepreneurial readiness. 

Industry experience

There is a temptation for all companies to look for the ‘lowest-risk’ hire. A candidate with prior experience in the industry is often considered a more reliable bet, a ‘plug-and-play’ solution. Theoretically the ramp-up time of ‘having been there and done it before’ is less than someone learning on the job. There is some truth to this, bringing knowledge of relevant KPIs, familiarity with the competitive market landscape, what works and doesn’t. However, hiring a CFO from outside the industry will bring a fresh perspective, and objectivity in thinking about how things can be done differently, the root of transformation. 

• Curiosity

• Adaptability

• Innovation 

These 3 traits can help bridge the gap between industries. If one defines degrees of separation we can understand how knowledge of other sectors can be adapted, and actually, bring benefit. For example, a biotechnology/pharmaceutical company facing supply chain challenges and how to bring their product to the consumer, might benefit from hiring a consumer brand’s CFO, with strong knowledge of distribution channels, product marketing, retail margins, etc.

The overarching requirement is shrewd commercial acumen. 

Prior PE / portfolio company experience

The significance of this trait will vary from fund to fund and is usually at the discretion of the investment director / principal.  In of itself, portfolio company experience is not essential, it is more the knowledge and discipline that this tenure will have instilled in the CFO. Customarily in the PE world, IRR is always in the spotlight. The timeline for results is shorter, and demands from investors high. Highly leveraged investments put an acute focus on managing cash, and necessitate operational excellence.

Listed company / IPO experience

The importance of this credential depends on the PE firm’s preferred exit strategy. 

IPO experience can be useful but it is only one form of exit strategy so public company experience is not necessarily required.  If the sponsor favours IPOs as an exit path for their portfolio companies then prior listed company or IPO experience could be beneficial. However, the potential exit strategy is typically several years away and could change throughout the growth journey. Therefore, what is more important is that the CFO can demonstrate a deep understanding of the business and a track record of driving value.

Candidates looking for their first CFO role will need to have strong operational backgrounds and be proven business partners. In many instances, candidates coming from divisional roles within large multinational corporations lack capital markets exposure, banking relationships, and cash management experience. Aspiring portfolio company CFOs are encouraged to seek out the chance to round out their skill set, possibly with a stint internally with the treasury function. 

Storyteller

The CFO will be pivotal in any successful exit process. Storytelling is a crucial skill for all high-performing CFOs. To flourish, the CFO must be a compelling and credible communicator, able to articulate a powerful narrative to business leaders and investors. To secure high multiples for investors, the CFO needs to be able to explain an organisation’s strategy for growth, and compellingly present quality financial data to a wide audience of stakeholders.