Over the past few years, the Private Equity space has become extremely competitive. Valuation rates have been driven up due to cheap debt and a shortage of quality assets. Large companies have come down market to put their equity to work, which has increased competition for companies in the small- and mid-cap range. Due to low interest rates, many investors are expecting the high valuations to remain in the near future.
Recently, we hosted a discussion to shed light on the relationship between PE firms and their portfolio company’s CFO. Throughout the panel, five industry experts shared insight on characteristics, responsibilities and best practices for PE-backed CFOs.
The panelists ranged from board members at PE firms to CFOs with PE experience. Despite their differing roles, many of the panelists had similar viewpoints on the importance of the relationship and responsibilities of the PE-backed company CFO.
Post Transaction v. Pre-Transaction CFOs
Both pre- and post-transaction, the PE partners look to the CFO to be the point person at a company. Pre-transaction, the CFO is responsible for gathering compelling data and aligning the numbers to tell a story. Once the transaction is complete, the CFO is responsible for aligning with the PE partners to understand their strategy and provide frequent reports on the health of the company and opportunities for growth.
Although the role is very important, a CFO’s job can be a thankless one. Before the transaction, a disproportionate amount of the workload can fall on a CFO. He or she is responsible for pulling information together for the sale and telling a story around those numbers. Once the sale is complete, the CFO’s role changes overnight as the PE firm takes ownership.
Once the deal is closed, PE firms want to make sure that there is an experienced CFO in place to help grow the business. Depending on the current CFO’s skillset, PE firms may prefer to bring in a new CFO to help grow the company post-sale. Many times, this decision depends on the experience level of the current CFO and how the leadership team works together.
According to a report published by Deloitte, 70% of CFOs were brought in by a PE firm post-transaction. Many PE firms want to work with a CFO who has private equity experience and understand the pace, urgency, and prioritization of the new role. PE firms are looking to receive a return on their investment in just a few short years so having the right CFO in place is critical to achieving that goal. Partners need to be sure that a company’s CFO can maintain strong financials while providing forecasts and reports to the investors.
Regardless of whether a PE firm brings in a new CFO or keeps the current management team together, communication is a big change for many CFO’s post-transaction. While the CFO traditionally reports to a company’s CEO and board, a PE-backed CFO needs to have the skills to be transparent and communicate effectively with the CEO, board and PE firm. These relationships can be a delicate balance, and not everyone is up for the job.
Qualities of a Private Equity CFO
In 2014, Deloitte interviewed 150 PE-backed CFOs, CEOs and chairmen, alongside senior private equity investors to gain a better understanding of the roles and responsibilities of the PE-backed CFO. Throughout these conversations, many shareholders insisted stewardship should be a CFO’s highest priority. PE firms need their CFO’s to concentrate on delivering accurate numbers and financial reporting from the moment the transaction is completed.
Experts on our panel also discussed the importance of strong communication and project management among PE-backed CFOs. Many traditional companies look at 5-10-year long-term growth objectives, whereas PE firms are looking for a much faster turnaround. A PE firm’s 3-5-year growth trajectory requires the CFO to maintain control of the numbers and be a strong communicator. This allows the CFO to properly advise the PE partners around the firm’s growth strategy, so they have a constant pulse on the health of the organization.
The responsibilities of a PE-backed CFO often require the help of a strong financial team. The CFO needs strong leadership and management skills to get the job done. A PE-backed CFO needs to be able to work at a strategic level, so it’s critical to have a team in place that can crunch the numbers and be responsive to the fast-paced demands of the PE firm.
Although the role of the PE-backed CFO can be challenging, the relationship between a good CFO and a PE firm can pay off in the long term. Many PE firms want to find CFO’s that they can work with repeatedly. When CFOs can work in sync and build trusting relationships with PE firms, it’s likely they’ll be considered for future roles with the firm.