Private equity and venture capital CFOs are now acknowledged as a specialist group within the broader world of CFOs. Those CFOs with a track-record of achievement within the private equity/venture capital sector are in high demand, especially if they have led the successful exit of a company.
As CFOs entering into private equity will face new challenges, it is worth reviewing the traits and characteristics that are consistent with experienced and successful private equity CFOs. The following five ‘R’s help to provide an effective template defining what a CFO needs, aside from core technical skills, to be successful in the world of private equity.
What differentiates many experienced private equity CFOs is their personal risk-reward profile. Joining a private equity company involves sharing in both the heightened risks and rewards of success and failure. CFOs with private equity expertise recognise this and welcome this level of risk exposure.
They tend to be entrepreneurial with an appreciation that both growth and turnaround situations can be riskier ventures. Another element of risk which factors into a private equity CFO’s profile is that of the capability to effectively manage and mitigate risk.
Whilst all CFOs have risk management as part of their mandate, private equity CFOs work towards timelines for an exit so need to identify business and financial risks rapidly and deal with them effectively.
The CFO is a key architect of managing risk from maintaining effective liquidity to ensuring business strategy is always financially viable. Rapid growth and/or cost-base transformation requires a risk management-based approach which is led by the CFO.
Private equity strategies are realistic but ambitious so management teams will drive hard to achieve them, including pursuing riskier strategies such as accelerated M&A for a buy-and-build venture or closing down under-performing divisions in a turnaround situation.
Both scenarios as well as others within private equity backed companies involve the ability to take calculated risks and implement business plans which have a higher risk element than found within most corporate or private companies, an approach the CFO needs to be fully aligned with.
Private equity CFOs who have worked in the sector for a sustained period have usually adapted their requirements and approach to rewards. Attaching a significant proportion of personal financial incentives to the ultimate exit of a portfolio company through equity provisions is the model CFOs have embraced within private equity.
CFOs working in private equity accept a reduced annual compensation package when compared to their corporate equivalents. Base salaries can be marginally lower and there is typically an absence of features such as a pension plan, listed share incentives or “stretch” bonus potential due to the focus on the lucrative equity shares.
As a result, these CFOs have a different perspective on reward, recognising that the real rewards are achieved once they have played their part within a management team that has delivered on an exit strategy. It is critical a CFO is committed to this private equity reward structure and philosophy especially for those moving into the sector from a more traditional business environment.
The intellectual reward and sense of achievement gained through helping re-shape a business towards a successful outcome is a major motivator for experienced private equity CFOs. These CFOs will often judge themselves on these accomplishments, not just the financial gains they have made.
Private equity CFOs need to be pragmatic and tenacious characters who demonstrate a resilient attitude at all times. The task at hand for a CFO working within private equity is to improve a company’s valuation during a broadly defined period of time.
This creates time and performance pressure which can be daunting for the uninitiated but is mandatory to subscribe to within private equity. A CFO operating within private equity needs to have the fortitude to adapt and thrive throughout the accelerated pace of transformation a business will experience following investment.
Working within an environment of pace and intensity creates a specific set of challenges and requires certain characteristics. Private equity CFOs understand that developing mental toughness is vital for success not just internally but with investor interactions too.
A private equity CFO not only has to operate as part of a leadership team working resolutely to improve business performance but also has to work closely with and deliver to demanding investors.
Working within a private equity environment involves working with a heightened level of rigour and diligence. All experienced CFOs within the private equity sector are accomplished at examining the minutiae and have developed a highly detailed and analytical approach to finance.
This level of rigour is a necessity as it reflects the detail orientation and approach of the typical private equity investor and consequently what they will expect from the CFO. The meticulous nature of a private equity CFO is evident when applied to the forensic attitude CFOs will take to the fundamental numbers within a business.
The aims of a private equity venture impinge upon the value a CFO can extract by bringing a highly analytical approach into financial management. This focus on detail cannot be overstated and is a principal feature of accomplished private equity CFOs.
The success of all management teams is determined by success but for a CFO working within private equity, the focus on results is even more acute. Given a private equity or venture-capital backed business is on a path towards an exit, every day counts. This mantra presides in the mind sets of most experienced private equity professionals and the CFO is no different.
Results must be monitored and delivered in an accelerated fashion within private equity and whilst the ultimate conclusion may be more visible in terms of an exit, it is a sequence of smaller outcomes and achievements that will lead to this.
The CFO who has a real appreciation of the private equity approach will be focused on daily, incremental business results as well as the longer-term goals. The results-orientated mentality of CFOs is a broad characteristic which is not simply reflective of an ability to monitor and manage developments but to actively source and create the most productive outcomes.