What makes a Private Equity CFO the Ideal Candidate?
A recruiter provides detailed information about the thinking processes of P.E. Companies looking to hire a finance chief in their portfolio.
Private equity firms are looking to maximize the value and longevity of their holdings. They are increasing the use of new CFOs. Private equity at its best CFO Both operational and strategic, and act as a thought partner in various divisional and functional aspects of the company.
Strategic CFOs will focus on growth and see the business from the windshield, rather than the rearview mirror as controllers do. A CFO who is also operational will oversee many functions. Finance Information technology, including but not limited to information technology, legal, human resources and real estate.
Private Equity CFO backed companies often view the CFO as the channel of information to the financial sponsor. This includes communicating financial results, working through capital structures issues or M&A opportunities, and speaking the common language of finance.
Private equity firms are often influential in the selection of the CFO, although the final decision usually rests with the CEO of the portfolio company. The underlying investment thesis of the company may be a factor in the selection of a CFO.
A CFO with experience in the acquisition and integration of companies is essential if growth is primarily from M&A. A CFO who has experience in capital markets and public companies will be valuable if the exit strategy calls for an IPO.
Comparison of a Large Company and a Small Company
The conventional wisdom is that the environment in which an incoming CFO will work should be at least equal to the future state of the portfolio business at the exit. If a private equity firm hires a CFO to manage a $500 million business, and its investment thesis calls for international expansion to double its revenue, they want a CFO who can manage a business with at minimum $1 billion in revenues and the complexity of international operations.
However, larger is not always better. The CFO of a multibillion dollar business will bring more scale, scope, credibility, and credibility to the job, but he/she will be more comfortable working in an environment that has far more resources.
Although the CFO might have worked in an environment that already had the infrastructure in place, the challenge of implementing ERP was not something that he or she would be accustomed to. The ideal portfolio-company CFO is a combination of a solid understanding of what good looks like from previous experience and the entrepreneurial spirit required to succeed in a smaller setting.
Not every Candidate for CFO Combining both of these experiences is possible, but those who have only worked at large companies may be more inclined to show evidence of entrepreneurship by the nature of their advanced roles.
Many finance executives have been able to work in low-resource areas of multinationals, such as emerging markets. This has allowed them to be adaptable and to take a hands on approach to their roles.
The Proven Private Equity Chops
What is the importance of prior PE experience for incoming portfolio-company CEO? It depends on the sponsor. Some say it's a nice-to-have, while others insist it's essential.
Someone who has been the CFO of a private equity-backed business will have a good understanding of how to operate in a lean environment, drive operational excellence, communicate with a private capital board and know what information is required.
A CFO who has worked for a sponsor-backed company and has been involved in an exit with measurable value is even better. Although it is possible to argue that a CFO can learn as much from an operationally challenging private equity situation as a CFO, sponsors are more comfortable with someone who has helped to achieve positive outcomes.
Because of the three-to five-year holding period, some experienced private equity CFOs might have the career path of a journeyman. This can sometimes be seen as a red flag.
However, a private equity CFO could be the victim of his/her success and may need to find a job elsewhere depending on the type of exit (sale or sale to strategic buyers, sale to a sponsor or IPO).
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