During the past 10 years, Spencer Stuart has completed more than 3,500
assignments in North America for private equity clients, many of these for
portfolio company chief financial officers and other critical finance leadership
positions. In fact, 30 percent of CFO assignments within the firm’s Financial
Officer Practice are for private equity-backed companies. Through this work,
we have interviewed thousands of candidates, portfolio company executives
and investment firm leaders. These discussions have proven revealing about
the demands on the chief financial officer of a portfolio company and the leadership
traits of the executives who are most likely to excel in this environment.
In most portfolio companies, no executive other than the CEO plays as significant a
role in the success of the venture as the chief financial officer. Partner to the CEO
and the private equity sponsor, the CFO has a uniquely challenging position, requiring
exceptional technical skills, an entrepreneurial mindset and a hands-on, get-the-job-
done orientation.
So what does it take for a CFO to succeed in private equity today? Drawing on our
extensive experience recruiting finance leaders for portfolio companies as well as
conversations with a range of experienced CFOs and private equity partners, we present
five critical factors for CFO success in a portfolio company.
Strong technical and operational skills are not enough to be successful as a CFO in a
portfolio company. Equally important are a CFO’s leadership skills. As a key partner to
the CEO, a portfolio company CFO must be a passionate advocate for the business and help
keep the organization focused on executing key priorities. He or she must be a proactive
leader, willing to drive the business agenda with the CEO and own the numbers —
challenging the assumptions and identifying weaknesses in forecasts coming from the
business units.
The CFO also has a leadership role to play with the private equity firm. As much as
private equity sponsors understand about the company’s financials, the CFO and CEO are
in the business every day and have their fingers on the pulse of the organization. The
CFO has to have the confidence and resolve to be an advocate for the management point of
view, even if it’s different from the private equity sponsor’s perspective, making sure
the board understands how decisions support the overall financial goals. “If you really
know something is not a good idea, you have to be willing to speak up. The private
equity firms look to management to be the final filter for avoiding the big mistakes. If
you’re at all unsure of yourself, passive or have to keep your job no matter what, any
of those things should probably disqualify you from the job,” said one CFO. On the other
hand, a major role of the CFO in a private equity situation is to serve as a conduit
between the management of the company and the private equity sponsor. Wearing these two
hats can amount to a constant balancing act for the CFO, and can put the CFO in an
awkward spot with the CEO if the business is struggling.
CFOs and private equity partners agreed that strong executive leadership skills
differentiate successful CFOs from those that struggle in a portfolio company role.
Without strong operational knowledge of the business, a proactive approach to
identifying and addressing issues that arise and confidence when dealing with the
private equity sponsors, a portfolio company CFO is unlikely to be successful.
“Especially when there are multiple sponsors, the private equity partners want to be led
— unless the company’s going in the wrong direction. So, being patient, but also
decisive enough and willing to lead are important characteristics,” a portfolio company
CFO told us.
The CFO is typically the key player in driving value creation and improving cash flow
and operational performance. As one portfolio company CFO told us, “When it comes to
driving performance in the business, the sponsors have an expectation that the CFO will
be a kind of performance czar.”
Because of their intense focus on value creation, portfolio company CFOs are usually
in the best position to identify opportunities to improve profit margins, cash flow and
EBITDA, alert the CEO and private equity sponsors to potential problems meeting debt
covenants and challenge the organization to improve business performance. Working
capital and EBITDA are critical in private equity situations; CFOs too accustomed to
relying on the “parent ATM” may have difficulty if they are not attuned to watching cash
and guarding spending.
When CFOs struggle in a private equity environment, it’s often because they are not
detailed enough, react too slowly to developments that threaten performance or are not
vocal enough about the issues they are seeing, private equity partners say. “One CFO I’m
mentoring is not proactive enough with the leadership team and helping to drive the
agenda and owning the numbers. He tends to sit back and say, ‘I got this number from
sales’ and accepts it at face value. A CFO needs to be involved enough in the operations
to be able to identify the weakness in a forecast.”
In light of the role CFOs are expected to play, what skills do they need? First,
strong technical finance knowledge and operational experience are critical
characteristics for finance leaders in most portfolio companies. The CFO has to be
comfortable with cost cutting, driving synergies and divesting non-core assets, while at
the same time improving margins and looking for top-line growth opportunities. They need
good analytical skills, excellent communication skills and a thorough knowledge of the
business and its triggers or leverage points.
“We look for a CFO who really understands how the day-to-day operations work and is
willing to get involved in operations. We’re less concerned about having a strategic CFO
or one experienced in M&A or the debt market because the firm can provide those skills,”
said one private equity partner. This discipline around operational or performance
management is something many CFOs say they will carry with them, even in environments
without the leverage of a portfolio company. “When I compare my understanding of our
cash business and the way cash flows through our business to what it was three years
ago, it’s completely different. As a result, I’m a much better CFO now,” said one
portfolio company CFO.
Nevertheless, there is no-one-size-fits-all portfolio company CFO skill-set. Each
private equity firm has specific characteristics it looks for in CFOs based on its own
model. Some place a higher premium on industry experience, while other firms look for
“best athlete” CFOs who can quickly get a feel for the business and understand the unit
economics, how the company makes money on each transaction and the profitability of the
business. The investment thesis also influences the necessary skill-set, as well as the
firm’s in-house capabilities. For example, private equity firms without internal
expertise in capital markets and mergers and acquisitions may look for CFOs who bring
that experience; firms that have that expertise in-house typically place less of a
premium on those skills in CFO candidates.
Portfolio company environments tend to be very entrepreneurial, so private equity
sponsors look for CFOs and other senior leaders who are willing to do the work rather
than those who want to just manage the work. In fast-growing companies, particularly,
the organizational structure always lags behind the needs of the business, so senior
executives have to be entrepreneurial and self-starting.
Private equity sponsors are looking for executives who will treat the money as their
own and deliver on it.
“The fundamental skills for a CFO may not be very different between public and
private equity environments, but we look for people who have the core skills — from the
controller function to planning and analysis, accounting to treasury, etc. —
and also a willingness to roll up their sleeves and do the work. We look for an
experienced CFO who’s done it all before but is still grounded and humble enough to do
the work,” said a private equity partner. As a result, a portfolio company may not be a
good fit for someone used to having a large support structure at his or her
disposal.
Another private equity leader said his firm vets CFO candidates’ experience in the
key disciplines with detailed questions about the function and how they have handled
issues in past roles. “This helps us get a feel for how involved in the details the
person was. Many executives very candidly say, ‘I know how to do that, but my controller
really takes care of it.’ Whereas, other people have certain processes that they try to
build into the system in any company they go.”
Central to portfolio company success is agreement between the board and management
team about the potential for the business and a well-defined plan for getting there. A
shared understanding of the investment thesis and model is especially important, as in
many cases portfolio companies require strategic transformation or operational
restructuring to achieve the exit strategy, whether it is selling the company or taking
it public.
The investment model, the growth phase, macroeconomic conditions as well as the stage
of the investment — whether its managing the business or preparing the company for sale
— dictate the necessary skill-set and experience for the CFO. The kind of CFO needed to
prepare the company for a sale or an IPO can be quite different than the CFO skill-set
needed following the initial investment or if the business encounters
unanticipated challenges.
When they are evaluating a target company, private equity firms use the extensive due
diligence process to understand its business fundamentals, identify opportunities to
improve performance and evaluate the leadership team. To ensure that the CEO and CFO
buy into the plan and commit to its milestones, one private equity partner we
interviewed said his firm takes management through a strategic planning process during
the due diligence phase, which ensures that the firm and management are on the same page
about how to grow the company. It is important for private equity sponsors to maintain
that same attention to matching the skill-sets of the CFO with the needs of the company
over the life of the investment.
One experienced CFO described working with a portfolio company board as having a
board that’s almost constantly in session. CFOs and private equity partners agreed that
the interaction between a portfolio company CFO and the board is more intense, more
frequent and more intimate than in other ownership models. Board members usually have a
significant personal stake in the company and are very knowledgeable about the business
and, therefore, have the motivation and the means to hold the CFO accountable for
performance. They meet frequently with management, seek information about the business’
performance on a continual basis and can bring to bear the resources and contacts of
their firms. The result is that CFOs strive to elevate their game. “I always want to
stay a step ahead of the private equity firms. We never want to be in a situation where
the sponsors are telling us what to do,” said one CFO. “This means that our pace and
energy level have to be a lot higher.”
One advantage of the private equity model, say CFOs, is having more minds attacking
the various issues that arise. “Everything from financings, potential acquisitions,
operational initiatives — we can scale up to deal with them because we’ve got the
resources of the private equity firms,” said one CFO. Sponsor firms provide access to
different advisers than portfolio companies may have worked with in the past. And
because they work with a stable of businesses, sponsors often have experience dealing
with challenges that arise or can connect the management team with leaders of other
businesses in the portfolio who have valuable perspectives. In club deals, the multiple
sponsors can serve as checks and balances to each other, and the different firms also
have different intrinsic strengths that management can draw on.
Nevertheless, CFOs going into a portfolio company should be aware that private equity
sponsors’ bias toward extensive information-gathering and analysis means that there’s a
tendency to deliberate longer on issues with the goal of finding the perfect solution.
“People running companies understand that there are other factors than getting the
perfect answer, which include timing and speed to market. You may not make the best
decision, but you can execute it well and get to market sooner,” according to one
CFO.
To succeed in this environment, CFOs have to be able to handle a high level of
scrutiny and have strong consensus-building skills and patience, particularly in club
deals where representatives of multiple owners have to come to consensus on key
decisions. Private equity partners say they are careful to describe the different
working relationship with the board when meeting CFO candidates. “It’s not going to be
four or five perfunctory board meetings a year. It’s going to be 10 or 12 very in-depth
board meetings a year, where we’re going through in detail what’s going on in the
business, as well as weekly reporting and weekly conversations with the board,” one
private equity partner said.
The most effective portfolio company CFOs also are sophisticated communicators. They
understand their role in managing the flow of information between the finance team and
the private equity sponsors, and the need to quickly communicate developments in the
business to the sponsors. Private equity sponsors expect CFOs to be straightforward and
open about the challenges the company faces, what management is doing about them and the
likelihood of success.
Savvy CFOs build a rapport with the sponsors, while also maintaining the trust of the
CEO. They view the sponsor firms as partners in business and are willing to reach out
and ask for help. “There’s an interesting trait in the CFOs who are the most effective;
they are willing to form a sort of subcommittee of private equity principals who can
serve as a sounding board on certain issues, such as capital structure issues,” observed
one private equity partner.
The chief financial officer plays a critical role in the success of any private
equity portfolio company. A CFO with the right technical skills, entrepreneurial mindset
and leadership capabilities can translate into significant additional value for the
sponsors; conversely, a CFO without the operational discipline or sense of urgency can
be a significant impediment to the company’s ability to reach financial targets and
achieve desired returns.
However, finding the right portfolio company CFO can be extremely challenging. In
most situations, private equity firms are looking for a “CFO++” profile — an experienced
finance leader who not only can manage the financials, but also can contribute to broad
business decisions, be a partner to the CEO and be an operational leader as well.
Unfortunately, the pool of executives able to step into this broader role is limited.
Requiring previous CFO experience further narrows the talent pool.
In this environment, private equity sponsors need to be realistic about the
compensation requirements of the highest-performing players; the best talent still
demands a premium and candidates are less willing to trade cash for equity. Private
equity firms need to prioritize the capabilities and personal characteristics needed in
a CFO, based on the investment thesis; the existing skill-sets resident in the portfolio
company or private equity firm; the firm and company culture; and considerations such as
the degree of industry knowledge or strategic change that is needed. While private
equity firms almost always express a preference for finance leaders who have previous
experience as a CFO in a portfolio company environment, the key is to find the
individual with the rare combination of finance experience and a willingness to do the
heavy lifting required for the first 18 months. This is critical to unlocking the value
of the deal before they can get to the more strategic, bigger-picture opportunities.
Candidates must be screened for their ability — and willingness — to do the work.
Private equity firms and their boards will increase the odds that their investment
will succeed by hiring a CFO with the right combination of experience, core competencies
and passion for the company’s success.
PORTFOLIO COMPANY CFO SKILLS
- Strong technical expertise, including P&L management, cash flow forecasting
and debt restructuring experience
- Entrepreneurial and self-starting orientation
- Ability to develop, execute and focus team on value creation
- Risk orientation and sense of urgency
- Thrive on change and solving problems
- The leadership capabilities to translate the vision into flawless execution to
deliver results
- Excellent communication and consensus-building skills to keep multiple
constituencies happy
- Ability to manage the company toward the exit that creates the most value for
the private equity firm
- Fortitude: the confidence and resolve to be an advocate for the management
point of view
THE CANDIDATE'S PERSPECTIVE
Private equity portfolio companies can represent very
appealing opportunities for high-achieving finance executives.
Entrepreneurial-minded leaders often are willing to
exchange the relative security and longevity offered by corporations
for an equity stake in a portfolio company and
the possibility of a large payout following the company’s
sale or public offering. Another attraction is the relative
freedom from the kinds of quarterly financial reporting requirements
of a public company and the expense and
preparation required for regulatory compliance. Finally,
a portfolio company’s well-defined end game, smaller size
and engaged board of directors can make it easier to mobilize
the organization to accomplish its goals. However, it
is very important that executives new to private equity understand
the trade-offs and evaluate whether their experience,
work styles and preferences represent a good fit for
a private equity role. Those who are most likely to succeed
in the private equity environment are CFOs who not only
possess the technical expertise, but also thrive amid challenges,
are comfortable with risk, have a sense of urgency
and the ability to focus the team on value creation, and
have the confidence and resolve to work as a partner with
the CEO and the private equity sponsors.
Before accepting a portfolio company role, CFOs should
conduct their own due diligence about the company and
the private equity firm, regardless of where the company
is in its investment model. Due diligence goes beyond
investigating the financial health and revenue projections
for the company. It includes talking with the CFOs of
other portfolio companies and getting a sense of the private
equity firm’s culture. It is important to assess the
degree of cultural change required to sustainably improve
the results of the company, and whether your skills and
work style represent a good match with the demands of
a private equity environment.
One potential area of misunderstanding is the compensation
model, and CFOs should make sure they understand
the components of short-term and long-term compensation
within the model and be comfortable that there is
enough equity to recruit a strong team. “You could be with
the company a long time before the exit, so you should
understand the compensation formula and believe in the
business,” one CFO said.
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