The intensity of the portfolio CFO role is not for everyone, but for those who break into this market, the rewards are there for the taking, suggests Redgrave Partners’ James Kenyon
FOLLOWING a year of near record exits at better than expected rates of return, uninvested dry powder currently stands at a record $1.3trn (£900m), according to Bain & Co’s latest Global Private Equity Report. Record levels of activity, coupled with this dry powder is naturally linked to an increased demand for skilled senior leaders capable of managing and transforming PE portfolio companies, and delivering successful exits for their sponsors.
The portfolio company CFO is, alongside the CEO, the most crucial talent decision for the sponsor. With Deloitte estimating that around 70% of portfolio CFO’s are brought in by private equity firms, this is the most in demand role of any portfolio executive team. Equally, there is little dispute that the CFO’s credentials are the most sharply defined and non-negotiable. The position carries significant responsibility and requires exceptional talent. The portfolio CFO is accountable for the successful implementation of the strategic business model – at pace – and with often limited resources and under intense pressure.
The DNA of a successful portfolio CFO has been much analysed and commented upon. Through our own private equity CFO searches, it is evident that PE firms look for certain critical factors with a justified rationale when selecting CFOs.
Typically, a portfolio CFO will have strong academics with either an accountancy qualification or an MBA and a diverse wealth of experience and expertise. They will be tenacious and analytical with the operational and commercial acumen to get to the heart of a business, identify cost excesses, improve productivity and efficiency and, of course, generate profits. More often than not, they will have held CFO or FD positions before with proven experience of the full range of responsibilities. Generally, prior experience as a PE portfolio CFO, relevant situational, rather than sector, experience and ideally M&A expertise are all preferred.
Often, they will have the duality of both large and small company experience. The larger corporate experience brings professional training and understanding of rigour, discipline and complex corporate systems whilst the small business experience demonstrates hands on resourcefulness, agility and the ability to deliver without the support of a well-structured large organization.
Public company experience can be advantageous as it typically brings a robust financial reporting capability alongside knowledge of handing investor relations. This expertise is particularly attractive if an IPO is the preferred exit route and the CFO will be required to remain in situ for the initial period post IPO.
With relatively limited resources at hand, a portfolio CFO will need to be tenacious, process-oriented, financially disciplined and prepared to roll their sleeves up and muck in in order to drive the strategic business plan and deliver the high level of detailed and accurate financial metrics that the PE firm will demand.
Diplomacy and communication skills, together with persuasiveness and the ability to influence are absolutely key. The CFO will have to operate effectively, juggling the sometimes conflicting priorities of the different parties involved, including banks, PE sponsors, the management team and the CEO or founders. The CFO must be able to present a vision and operating plan for the future that satisfies and motivates all the relevant parties. Additionally the CFO will need to present and demonstrate the progress being made and goals being achieved to PE investors and banks alike. Finally at exit, the ability of the CFO to present convincingly to potential buyers (depending on the exit route) will be of utmost importance. This is in part why successful prior exit experience is highly valued by PE firms.
The CFO must be able to cope with the scrutiny of the PE firm whilst working in partnership with the CEO. The ability to work with urgency, focus and decisiveness is essential. Timing is critical – with a PE firm looking to hold the portfolio company for no more than three to five years (although economic conditions have lengthen this in recent years), the CFO must be single mindedly able to take decisive actions and make time critical decisions to ensure the business plan is executed according to the prescribed timetable.
The unique demands of the private equity market place require exceptional talent. It is unsurprising that demand exceeds supply, particularly when the complexities of timing are added to the mix. A CFO active in a PE portfolio company will be available only at the beginning or end of a deal cycle. On the other hand, a PE firm will often (although not always) only commence the search for a CFO once a purchase is completed. At this point, speed is critical, as the new CFO needs to be installed as soon as possible.
As the battle rages on for CFOs with the right aptitudes and proven records of profitable transactions, compensation packages are moving upwards. Typically these are heavily weighted to performance and successful exit completion. The intensity of the portfolio CFO role is not for everyone, but for those who break into and thrive in this market, the rewards are there for the taking.
James Kenyon, Consultant, Redgrave Partners