Fiduciary to visionary: the evolving role of the PE-backed CFO

May 2018  |  FEATURE  |  PRIVATE EQUITY

Financier Worldwide Magazine

May 2018 Issue

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 its 2018 global PE CFO survey, ‘Operational excellence: one path or many?’ – which features the insights and observations of 110 PE CFOs across the globe – EY examines the evolution of the CFO role and highlights “how PE firms are shaping their operations in order to achieve sustainable, operational efficiency in their finance offices”. Among a range of topics, the survey outlines CFOs’ strategic priorities, technology and data transformation, talent management, outsourcing and the future landscape of the PE industry.

Drilling down, the survey notes the different pathways PE CFOs are now taking to attain operational success. These include CFOs investing or planning to invest in next generation technology, reaffirming talent management as a top priority, with talent attrition considered a top risk, viewing outsourcing as a way to shift finance teams’ routine responsibilities to more value-add activities and raising awareness of threats such as cyber security breaches.

Complementing EY’s findings is a recent Deloitte report, ‘Maximising value on exit – the role of the PE backed CFO’, which characterises the CFO role as multifaceted.  “CFOs should be aware of the importance of their influence and empowered to know that they sit in strong financial markets,” states the report. “They have the ability to deliver game-changing value not only to their business and their team but also in terms of personal achievement and success.”

Key characteristics

The key characteristics of the CFO role are expanding well beyond financial matters alone.

“In today’s environment, a CFO’s role is strategic,” says Mike Lo Parrino, a partner at EY. “For traditional back office functions, such as accounting and reporting, a strong controller is critical. CFOs must be forward-looking and be expected to drive change by utilising a mix of technology – including advanced analytics, data management and automation – talent and third-party vendors to maximise operational efficiency.”

As well as strategic, the role of the CFO in many PE scenarios is operational in its scope. “It is not just about keeping score and reporting numbers, but rather about driving the business forward,” suggests Claude Shaw, global leader of the private equity practice at Egon Zehnder. “Given how operationally focused they are, many PE CFOs will oversee multiple functions beyond just finance. Typically this will include IT and possibly other areas such as HR, legal, real estate and supply chain. As an aside, in this operational capacity, the CFO performs many of the duties that would otherwise comprise the role of the chief operating officer (COO).”

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.”

PE experience

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.”

Key objectives

While there is no ‘one-size-fits-all’ solution to finding the right CFO, the requirements of the role are evident and typically embody several key characteristics, with PE experience optional for some, but not others. Viewed purely as a box-ticking exercise, the appointment of a CFO clearly calls for an increasing number of ticks.

“Quite simply, there is no substitute for experience and a demonstrable track record,” says Philip Bolton, executive director at Ocorian. “While the CFO’s responsibilities are traditionally operational excellence and financial control, there is a broader expectation in PE that value creation within a targeted timeline – and anticipated exit for the PE firm – will be a key objective. Value creation is driven by top line growth; not just organic but, for many PE firms, via a buy and build M&A strategy. The CFO is central to driving this success, so prior experience in both M&A transactions and integrations is a must.”

Another tick is the desire among PE sponsors for a CFO to be forward-looking and strategic, and serve as a thought partner to the chief executive and a business partner in the quest for value.

“He or she will be hands-on and operational, often wearing multiple hats and overseeing additional functions beyond finance,” adds Mr Shaw. “And perhaps most importantly, he or she will think like an owner, bringing entrepreneurial gumption, a hands-on approach, and a clear and timely communication style. The experienced PE CFO knows ‘what good looks like’ – both in the context of a best-in-class finance organisation and in the context of delivering value through a successful exit for a PE sponsor.”

Continuing evolution

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?”

For Mr Shaw, the role connects the PE board to the portfolio company, ensuring the right level of visibility into company performance and operations. “By driving operating excellence, the CFO is effectively translating the investment thesis into the right set of performance metrics and then partnering with all facets of the business to help drive results,” he observes.

In terms of how the CFO role is likely to evolve in the years ahead, one trend that has emerged is the CFO operating partner at fund level. This involves working with portfolio company CFOs to run the playbook – ensuring they have the right level of talent on the finance team, and the right performance metrics and financial visibility in place.

With such intimate knowledge and with the right systems to hand, the CFO clearly has significant capacity to capture and leverage data to advise the chief executive and PE sponsors (in the case of portfolio company CFOs) in their decision-making processes. “The CFO crosses all areas of the business,” says Mr Lo Parrino. “In that regard, the CFO is in a strategic position to pull the levers that move the direction of the company. In fact, PE firms value the analytical and strategic skillset of the role to the extent that CFOs often transition to the chief executive role.”

The ideal

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.

© Financier Worldwide

BY

Fraser Tennant