Chief Financial Officers of Private Equity (PE) backed companies must be fast on their feet, manage aggressive growth and be confident to make quick decisions. But are they ready for that transition and able to create value for a new investor?
The idea of leading a portfolio company can be appealing and attractive, however some CFO’s are ready to be tasked with reviving companies and building a very cohesive growth plan. This is not an easy job and once those individuals arrive in post, it is only then you get a true picture of the work that is required to achieve the outcomes and results.
Are they really prepared for the shock of change that could prevail in tough economic conditions?
Their own focus must be around creating value and opportunity, but in order to do that while improving operations, growth ratios, and controlling costs, can be a tough reminder of how difficult the role of CFO can be.
Borrowed capital adds extra pressure as the CFO must realise the investment return within a set period and often if the management team has been changed, there is no historic or c-suite team to fall back on for legacy information or data. This in turn can make the role much tougher especially if systems and processes need upgrading and the scrutiny from investors is more intense.
The CFO will need a strong underpinning management team to implement new processes and transform performance. What they often learn at the start of PE investment is that they find themselves leading a much smaller finance team than normal whilst trying to achieve more in a shorter time.
Priorities will undoubtedly be stakeholder engagement, managing cash controls, forecasting and compliance alongside creating a worthwhile strategy towards value creation goals.
With continuous pressure on delivering quarter on quarter EBITDA growth, to benefit the future valuation of the business, any investment in the cost base of a PE backed business must be fully justifiable from a return-on-investment perspective. This must also include generating a suitable return within the timescales given.
We must therefore remember that the role of the CFO in a PE backed business has some fundamental differences. One must have a relentless focus on the exit and value creation. The nature of PE investment means that it is almost impossible to predict the timing of an exit so the key to success is being prepared for exit from the outset. Not all CFO’s are capable of driving and preparing a business solidly for exit and within an extremely limited period to make significant value and growth for their investors.
Assessing your CFO’s capabilities objectively against your deal thesis and strategy via a human capital partner is the best solution, and if you’d like to speak to one of our consultants, please contact us.