Many chief financial officers (CFOs) are excited by the opportunity to lead a private equity portfolio company’s financials. The position looks good on a resume, often comes with a certain prestige and monetary bump; however, many CFOs do not realize what it takes to be successful at a private equity backed company. According to a 2019 survey, the turnover rate for private equity (PE) CFOs is greater than 80 percent. A majority of these exits take place within the first two years of a PE firm acquiring a company. CFOs are not meeting expectations or understanding their role in driving value. When this happens, PE firms don’t see the results they expected and contact me, an executive recruiter, to find a new CFO candidate.
Private equity environments are very demanding, and it can be difficult for the CFO to know which skills need to be honed and which pitfalls to avoid. To make the transition to a PE backed company a little easier, below are four pieces of advice private equity operating partners and executives want CFOs to know.
Communicate openly with your Operating Partner or PE executives
The role of a private equity operating partner (OP) can vary greatly between PE firms and their portfolio companies. In many cases, CFOs don’t fully understand what the OP has to offer, and that is why it is important for the CFO to have open communications with their operating partner. Ask your OP what resources are available so that you can have a full understanding of the tools at your disposal.
CFOs should also not be afraid to occasionally push back when OPs or other PE executives make a request. For example, if a requested financial report is going to take an inordinate amount of time and resources to compile, it is OK to ask why the numbers are needed and find out what the PE firm is trying to accomplish. Explain to the executives what it will take to provide what they requested so everyone is on the same page about the resources being dedicated to the task. Time and energy may be better spent completing other work, especially when what they want can be included in a regular report.
Keep your messaging consistent
As the CFO of a private equity backed company, you should be working closely with the company CEO to deliver consistent financial reporting and data analytics to the PE firm. It is surprisingly common for CFOs and CEOs to miscommunicate or to carelessly deliver divergent information to their private equity investors. Inconsistent information and communication do not inspire confidence. A successful CFO is able to work with the CEO to produce clear, consistent information that accurately reflects the state of the business sometimes on a weekly basis.
Strategically invest in technology
Due to the stringent financial reporting requirements of PE firms, staying up to date on the latest technology trends is important for increasing efficiency and staying relevant in a rapidly advancing industry. According to a 2019 survey by Deloitte, 82 percent of PE investors believe automation and technology are going to have a major impact on finance functions over the next 10 years. A successful PE CFO will make strategic investments in technology to enhance processes. Ideally, these investments will eventually cut labor costs and create a more efficient workflow within the PE portfolio company.
As a private equity CFO, you must start embracing technology. Old school financial reporting methods are being replaced by automation and as the CFO, you must be the one leading those changes. If technological advancements are not part of your strategic plan for the portfolio company, you need to pivot to start including them.
Private equity CFOs wear a lot of hats
As a private equity CFO, you must be flexible and wear many different hats. Before a business is acquired by a PE firm, a CFO might be perfectly fine filling the role of accountant. After a business is acquired, however, this is no longer the case. A PE CFO has to know how to strategically scale the business. Oftentimes, the duties the CFO previously held are increased exponentially to accommodate the rapid growth a PE firm demands.
Succeeding as a PE CFO
A typical PE experienced CFO will naturally oversee finances, but also may play a role in human resources, operations, supply chain management and negotiations, legal, information technology, and in some cases, real estate. A lot of CFOs inherited through an acquisition do not know how to adapt to these new duties required by the PE firm. That is part of the reason why CFO turnover is so high. You must realize a PE CFO role has higher expectations and you must quickly grow accordingly to match your new duties.
Ultimately, a strategic CFO is forward-thinking and has a personal and professional growth mindset. Your role as a PE backed CFO might be evolving into a more complex and challenging position, but it can also be the most fulfilling job opportunity of your career. If you remember the four messages above and work hard to bridge the skills gap, you will be more likely to succeed in your new role as a PE CFO.
Shawn Cole is President and Executive Recruiter at Cowen Partners Executive Search, a leading private equity CFO search firm.