CFOs with private equity experience are in high demand – a trend that we’ve seen increase over the past few years. However, the relationship between financial sponsors, their portfolio companies and CFOs has often been fraught with tension leading some CFOs to seek new opportunities – but this needn’t be the case. Consultant, James Foley, takes a look at some of the causes of the frustrations, how to build a strategy to hiring a CFO, and creating a work environment that works for everyone.
As a result of continued fluctuations in the economic space and world events, Private Equity (PE) firms across the globe have had to hold on to their investments far longer than they originally intended. However, 2024 appears to be the year that those firms, particularly those in Europe, expect to realise their investments with an estimated 250 exits expected to take place, according to a report by PwC. With this activity comes the need for a CFO to come in and help manage the exit(s), expectations as well as grow and manage a business.
Roles across all industries and levels have changed, and they will continue to do so, however, the role of a CFO is one position that appears to have developed the most. Previously, CFOs were expected to have a traditional finance and accounting background, now they’re expected to be fluent across multiple operational departments and be a commercial business partner with a history of strategic leadership all while leading a finance function.
For some, having these additional roles and responsibilities appears to be completely normal and an ‘assumed’ key aspect of a CFO where in reality, it isn’t.
Having or not having this experience isn’t necessarily the big issue, the challenge here is that this expectation is not often communicated with potential candidates, and the definition of what each of these additional responsibilities isn’t agreed upon with the board, c-suite or stakeholders. There’s a distinct lack of agreement on what it is that’s required, and what is communicated to potential candidates.
The three challenges
Unrealistic or loosely defined CFO job descriptions
It’s understandable that a private equity firm wants a candidate who has worked on multiple exits as well as experience working across different departments, but exactly what experience is required and what is needed in a firm needs to be clearly defined and communicated. This needs to be discussed and confirmed with relevant stakeholders, the board and ideally communicated in writing via a job description and included as part of the interview process.
Expectations
CFOs need to be strategic, excellent communicators, be able to make quick decisions and be a knowledgeable business partner as well as lead a finance department. Does your firm have the tools and resources available to help them be successful, and if not, what can be done to create a supportive work environment?
Clear role separation
What should or shouldn’t a CFO be expected to make decisions for? Their reach often extends right across a firm, but with investment managers, corporate developers and corporate financiers, who is responsible for what and when? When everyone’s roles and responsibilities are clearly defined and separated, each person is able to deliver on what they need to. If they overlap, there can be challenges.
Identifying and understanding capabilities
CFOs play a pivotal role in a company’s success and are an integral part of the senior leadership team. Just like any other leader, they not only need to deliver on their targets, but they need to be able to work effectively with their peers and with the board.
While interviews serve an important role, they can be limiting in terms of gauging someone’s abilities, strengths, weaknesses and how they approach challenges. Psychometric assessments are a useful way of assessing each of these aspects on a completely unbiased basis. When we work with companies to provide assessments, we provide a full debrief after the assessment for both the candidate and the company to go through the data captured and what it means in relation to the role and the company circumstances, now and in the future. It also acts as a springboard for both sides to ask additional questions and get clarification.
The results can then be used to create a plan for both parties so that once the candidate starts, expectations and managed and communicated effectively so that everyone can work together cohesively.
A plan from day one
From the first day that a CFO starts, we recommend creating an integration plan, that can be created in partnership with both the firm and the candidate. Instead of creating this and setting it in stone from day one, start with a conversation first, so that everyone has the opportunity to feed into it, shape what success looks like and how it can be attained. Firms may find that a new CFO will provide an alternative point of view that hadn’t considered before, and the new appointee will be able to learn the intricacies of the business. Here is a list of the key aspects we recommend taking into account.
- Align expectations of the role and key priorities
- Create a single source of truth and ensure that the correct systems and processes are in place
- Agree priorities with a 90-day and 180-day plan
- Establish team and leadership relationships and flexible ways of working
- Set up regular meetings with clear agendas and actions
- Be flexible and allow room for change.
In our latest white paper, ‘Unlocking success: Building strong CFO-private equity partnerships for the future,’ we take a deep dive into the key challenges facing CFOs and PE firms today and how to resolve them. Download the white paper now, and if you have any thoughts or experience you would like to share, contact consultant, James Foley.
