A strong CFO is absolutely critical to the success of any private equity-backed business. In fact, the role has become more important over the years and is arguably now on an even keel with the CEO. With investment horizons running to relatively short timelines, getting the right person in the role of CFO is essential.
We sat down with two experienced CFOs who have operated in private equity for over two decades. James Hayward, Senior Finance Operating Partner at H.I.G. Capital Europe and Paul Wheeler, previously a Senior Operating Partner at Francisco Partners as well as holding numerous Portfolio Company CFO/COO roles, focused on driving value creation and supporting successful exits. We discussed what skills make the most effective PortCo CFOs and how the role continues to evolve.
A key part of the CFO’s role in private equity-backed businesses is to not only hold the Board and the CEO to account, in terms of what is realistic to achieve, but also to identify and predict any potential risks along the way. With over 20% of senior leaders naming “horizon scanning” a key skill for success over the next five years, it is clear the CFO role requires a heavy focus on leading indicators. Paul Wheeler emphasises the importance of this. “Less experienced CFOs often report trailing indicators. For example, evidencing why the business didn’t make profit, or why they are running out of cash. However, a good CFO creates leading indicators that are future focused. They report on these religiously so they can be three to six months ahead of what the business is going to hit in the P&L. They need to be able to predict numbers and hit them as a baseline.”
By looking proactively at how the business is going to perform, rather than reactively at why the business has performed a certain way, the CFO can add much more value to the PortCo. This will support the organisation towards a much stronger return at the end of it’s investment horizon.
It goes without saying that the CFO and the CEO need to have a good relationship. Their skill sets should complement each other, and they should also have the authority and confidence to challenge one another.
James Hayward summarises this well, “Every CEO needs a good CFO – one’s a brake and one’s an accelerator, but it shouldn’t lead to smoking tyres. A CFO is there to stand up to the CEO, but also to protect them. The job of a good CFO is to ensure the CEO understands the numbers and is prepared and aware for any situation or question.”
With “communication” set to be a major skill for success over the next five years, a CFO’s ability to communicate effectively with their CEO and convey complex information clearly will have a huge impact on the change they can drive across the business. As Paul Wheeler says, “Communication skills are critical. A CFO and CEO can’t be at war with each other. CFOs need to simplify complexities and boil information down to four or five key points that the CEO can understand and share with the rest of the organisation.”
With private equity-backed businesses operating within short investment horizons, understanding the business case quickly and tracking the right metrics against this will define a CFO’s success in this environment.
James Hayward discusses this topic in depth, “CFOs must be commercial and prepared to execute very quickly. The great thing about PE is people make decisions really quickly and get on and do things. However, that means you need to be able to operate at pace.
The CFOs job is to understand the investment case and how it’s going to be strategically executed. The time horizon for it, which is often five years, will go very quickly once you embed the strategy and get it up and running. Therefore, any good CFO needs to understand what’s driving value creation and the multiples quickly.”
While there are a number of baseline technical skills that any CFO will need to be successful, operating in a private equity landscape requires experience in this space. One of the biggest differences in private equity is the pace at which CFOs are required to work.
“In private companies the goals of business are entirely related to the owner of the business. There may be less pressure to deliver quickly” Paul Wheeler says. This is echoed by James Hayward “The speed of execution is a lot quicker. There are less committees and meetings to make a decision. It is relentless.”
Another big difference, which is often only present in a private equity environment, is the combination of working with leading indicators and tying this directly into the growth strategy and business case.
Paul Wheeler summarises this, “The biggest transition is moving from a trailing indicator world to a leading indicator world. Often outside of private equity, CFOs haven’t understood the strategy of the business and how to get there.”
As outlined at the start of this article, the CFO role has increased in prominence in private equity-backed businesses and continues to do so. This is partly down to the market conditions within which they’re operating as well as the breadth of the role and function itself.
“There is much more focus on value creation than there ever used to be, rather than financial gearing. This puts an extra burden on the CFO to be part of the delivery plan.” James Hayward explains. Paul Wheeler builds on this further, “The CFO has become critical. Previously private equity funds were buying businesses at lower entry cost, but it’s a very competitive space nowadays, entry prices are far higher, putting pressure on return models, meaning the headroom is much tighter. This is where CFOs add so much value in how they navigate, with the CEO, the business execution to plan.”
In addition to this shift in the investment landscape, CFOs are also having to deal with a broadening of their function and roles. James Hayward outlines this, “The finance function is constantly changing. There are ESG requirements that all companies have to start complying with, risk management, managing teams and HR. The requirements of the role are much broader than they ever used to be.”
What is clear is that the CFO is an absolutely critical role that PortCo’s have to get right to drive the most value. While the role continues to evolve, there are some key skills that are non-negotiables when it comes to placing individuals in these roles. Spending the time early on in the process to find the right candidate will pay rewards as the investment horizon approaches.
