The CFO plays a critical role in the success of any private equity (PE) portfolio company. A CFO with the right technical skills, entrepreneurial mindset and leadership capabilities can translate into significant additional value for the PE 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.
In most private equity (PE) portfolio companies, no executive other than the CEO plays as significant a role in the success of the venture as the CFO. Partner to the CEO and the PE sponsor, the CFO has a uniquely challenging position, requiring exceptional technical skills, an entrepreneurial mindset and a hands-on, get-the-job- done orientation. This article presents critical factors for CFO success in a portfolio company.
Strong Leadership: A Proactive and Passionate Advocate for the Business
Strong technical and operational skills are not enough to be successful as a CFO in a PE portfolio company. Equally important are a CFO’s leadership skills. As a key partner to the CEO, a PE 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 PE firm. PE firms look to management to be the final filter for avoiding the big mistakes. On the other hand, a major role of the CFO in a PE situation is to serve as a conduit between the management of the company and the PE 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.
Exceptional Technical Skills Tailored to the Business
The CFO is typically the key player in driving value creation and improving cash flow and operational performance. 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. The CFO must also 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 and CFOs have to be especially attuned to watching cash and guarding spending. Therefore strong technical finance knowledge and operational experience are critical characteristics for CFOs in PE 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.
Sense of Urgency: All Hands on Deck
PE Portfolio company environments tend to be very entrepreneurial, so PE 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. Particularly in fast-growing companies the organizational structure always lags behind the needs of the business, so senior executives have to be entrepreneurial and self-starting.
Due Diligence and Beyond: Align Expectations
Central to PE 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. 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.
A Proactive Partner with Investors
The interactions between a PE portfolio company CFO and its board are 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.
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. The most effective PE portfolio company CFOs are sophisticated communicators. They understand their role in managing the flow of information between the finance team and the PE sponsors, and the need to quickly communicate developments in the business to the sponsors. PE 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.
PE firms and their boards will increase the odds that their investment will succeed by having a CFO with the right combination of experience, core competencies and passion for the company’s success. Harvest CFO Consulting brings highly-skilled CFOs to PE portfolio companies with solid PE portfolio company experience and the skill sets to deliver success.
