In most 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 private equity sponsor, the CFO has a uniquely challenging position, requiring exceptional technical skills, an entrepreneurial mindset and a hands-on, get-the-job-done orientation. There are a lot of factors to consider in your CFO search for a private equity portfolio company.
Strong technical and operational skills are not enough to be successful as a CFO in a portfolio company. Equally important are a CFO’s leadership skills. As a key partner to the CEO, a 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 most effective portfolio company CFOs are also sophisticated communicators. They understand their role in managing the flow of information between the finance team and the private equity sponsors, and the need to quickly communicate developments in the business to the sponsors. Private equity 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.
The CFO is typically the key player in driving value creation and improving cash flow and operational performance in a private equity portfolio company. 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, 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; therefore the CFO has to very attuned to watching cash and guarding spending.
In their CFO search, private equity firms want a CFO who really understands how the day-to-day operations work and is willing to get involved in operations. They may be less concerned about having a strategic CFO or one experienced in M&A or the debt market because the firm can provide those skills. This discipline around operational or performance management is a skill set that highly-skilled CFOs bring to companies regardless if leveraged by private equity funding. Highly-skilled CFOs understand the cash business and the way cash flows through the business and creates value.
Skill sets needed to be a successful CFO include:
- Strong technical expertise, including P&L management, cash flow forecasting and debt restructuring experience
- Entrepreneurial and self-starting orientation
- Ability to develop, execute and focus team on value creation
- Risk orientation and sense of urgency
- Thrive on change and solving problems
- The leadership capabilities to translate the vision into flawless execution to deliver results
- Excellent communication and consensus-building skills to keep multiple constituencies happy
- Ability to manage the company toward the exit that creates the most value for the private equity firm
- Fortitude: the confidence and resolve to be an advocate for the management point of view
The chief financial officer plays a critical role in the success of any private equity portfolio company. A CFO with the right technical skills, entrepreneurial mindset and leadership capabilities can translate into significant additional value for the 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. Harvest CFO Consulting reduces this risk by providing private equity firms highly-skilled CFOs with the skill sets to deliver high ROI to portfolio company investors.