Excerpted from Financier Worldwide Magazine: Across the length and breadth of the private equity (PE) landscape, there is consensus that the role of the chief financial officer (CFO) within PE-backed companies is undergoing an evolution.
As PE firms aggressively seek new opportunities to grow their portfolio, they are keenly aware of the pressures exerted by expansion and investor demands. Therefore, aligning a level of oversight which ensures the right decisions are made within the portfolio is key, which is why the CFO is so important.
In the view of Mercedes Chatfield-Taylor, managing partner of the private equity and venture capital practice at Caldwell Partners, the CFO helps provide what she calls the connective tissue of how financial insights should flow to the P&L. “They will work with the line of business leaders providing financial insights and data to help with everything from pricing, to customer lifecycle value. A CFO who brings this strategic finance and perspective and can communicate it to business line leaders is key. This strategic, operational, financial guidance from the CFO will allow the business to most accurately measure and drive tactical operations. This goes well beyond what CFOs used to do. It is an important quality that successful PE CFOs need to have.”
When analysing the merits of a potential portfolio CFO, PE sponsors often stipulate that candidates should possess experience of the PE environment. Although no hard and fast rule, the extent to which familiarity with typical PE dynamics forms part of a CFO selection process is difficult to determine.
“The answer will vary depending on whom you ask, but some PE sponsors will only hire CFOs who have had prior experience in PE, as it de-risks what would otherwise be a big question mark,” says Mr Shaw. “Others are more open-minded. What is most important is that the CFO thinks and acts like an owner, with the right sense of urgency and autonomy, and true orientation for driving results. Some of the best PE CFOs in PE-backed companies I have seen had never worked for a PE sponsor or even as an enterprise-level CFO. So while the dynamics of reporting to a PE board or operating in a levered environment were new, the right CFO can step into this role and develop experience while helping drive a business forward.”
Others, however, are more exacting when it comes to prospective CFOs being able to demonstrate a sound understanding of PE dynamics. “When we conduct a CFO search for a PE portfolio company, it is almost always critical that they have experience working successfully with PE firms,” acknowledges Ms Chatfield-Taylor. “These executives understand the sophistication, scale and complexity of the role and environment and are comfortable balancing the needs of the owner versus the needs of the business operators. That ability is incredibly important.”
In today’s challenging corporate environment, rife as it is with economic uncertainty, increased regulatory requirements, financial restatements and increased investor scrutiny, the need for a strong and enterprising CFO is undeniable. Furthermore, with the days long since gone when the role required little more than a number cruncher, today’s CFO, as a driver of excellence and the overseer of strategic and operational capabilities, is increasingly regarded as the glue that binds.
“The CFO is one part of the connectivity that binds a company together,” agrees Ms Chatfield-Taylor. “A great CFO thinks about a business like a business owner and a business leader, as opposed to an accountant. We have come a long way from the days of a spreadsheet wielded as power. Now it is a question of how does the CFO empower their sales leaders? How does the CFO work with the CEO to make sure that the right goals are being set so that they can be reached?”
The evolution of the CFO is ongoing and, according to the EY report, will continue to play a key role in helping PE firms achieve operational success. Moreover, as the one responsible for ensuring PE-backed companies maintain their competitive edge by operating at a high state of resilience and efficiency, the CFO role is pivotal to long-term business goals and aspirations.
“It is important for the CFO to be a business partner to the chief executive,” believes Ms Chatfield-Taylor. “And to be that partner they must have a strong reputation for being a trusted senior operator. A CFO who is very much a collaborator and an excellent communicator can take much of the outward-facing and storytelling burden off of the chief executive.”
An expert communicator, collaborator and operator, a financial disciplinarian and a strong team player with exceptional ability to influence and persuade across the length and breadth of an organisation – this is a fair representation of what the CFO of the future is expected to look like.