Private equity firms are constantly looking to maximise the value of their portfolio companies and place a lot of emphasis on working with strong management teams. There will be a lot of pressure on the CFO and PE houses often bring in a new candidate early on if they feel that the current CFO does not have the right background or experience.
This article looks at the key requirements to become the ideal candidate for a private equity portfolio company.
PE houses require a CFO who can run the finances, drive operating excellence and support strategic decisions as the company continues to scale:
The Financial CFO
The financial CFO will provide input into each relevant business function and will implement the necessary systems and processes to move the company to the next stage. CFOs typically develop a number of these skills whilst working in a public company finance function.
The Operational CFO
The operational CFO will oversee multiple functions beyond finance including legal, HR, IT, supply chain and real estate. Many of these skills are typically learnt within divisional finance or FP&A roles.
The Strategic CFO
The strategic CFO will provide input into key strategic decisions and will be the common link between the portfolio company and the financial sponsor. Former bankers tend to be strong in these areas.
There are very few CFO candidates who have all of these backgrounds, however the ideal CFO needs to be strong across all of them. There is typically more emphasis placed upon the operational aspects given the need for the CFO to provide decision support across a range of operational and strategic initiatives.
PE houses need somebody who can make the full journey throughout the life cycle of the portfolio company. Whilst it is helpful to have been through the PE journey before with another portfolio company, everybody has to do something for the first time prior to becoming an expert.
Private Equity CFOs will need to be strong leaders and will be at an advantage if they have relevant experience of the key strategic requirements for the business prior to its future PE exit. This may include further fundraising, acquisitions, international expansion, managing growth and achieving a successful exit through various planned exit routes.
They will need to be comfortable with being the CFO of the planned future business at the point of exit, which may be much larger and more complex than in its current standing. There is often less concern regarding whether the CFO has ever performed the role within a public company as the sponsor can provide the necessary support during any future stock market listing.
Existing CFOs within the same industry will naturally become attractive candidates, however the industry requirements will vary depending upon the levels of complexity and the regulatory environment.
PE CFOs require a number of competencies to be successful within their role as follows:
CFOs need to constantly drive the business forward given the significant levels of change throughout the private equity life cycle. They need to have a sense of urgency and be highly driven individuals, with a proven track record of delivering results. They should communicate effectively, manage expectations and avoid delivering unexpected bad news.
PE CFOs will work closely with the CEO as a strategic partner and will align the financial strategy with the wider firm. They will factor business objectives into decision-making and contribute strategically towards inorganic growth such as M&A activity.
PE businesses grow rapidly and are very dynamic organisations. PE CFOs will align the team to drive major change management initiatives and will constantly seek to evolve and enhance processes.
Interact and Influence
PE CFOs will communicate clear and timely results to external stakeholders, in addition to being a financial business partner across the firm. They will need to have ongoing collaboration with most departments and are required to influence business decisions.
One of the most important characteristics of a PE CFO is having strong leadership skills. CFOs influence most of the organisation and are key members of the management team. They need to be aligned with the business strategy and be capable of leading people through the private equity journey.
Private equity CFOs are vital members of the management team and take on a lot of financial, operational and strategic responsibilities throughout their role. They need to possess a range of important competencies in order to drive growth and support value creation.
PE houses will carefully consider up-front whether a CFO is suitable to make the journey across the private equity life cycle based on their background and experience.
Many CFOs will often end up becoming serial private equity CFOs, typically working across a number of roles and sectors throughout their career, with each role lasting between three and five years. They will often work closely with a few private equity houses and will be heavily incentivised by equity arrangements aligned to a future successful exit.