Article featured in realdeals 2019
Adam Akbar, founder and head of CFO executive search firm Bronzegate, reflects on the findings of a survey of private equity portfolio company CFOs.
As a firm who interview and assess private equity portfolio CFOs on a regular basis, we encounter huge diversity in their expertise, backgrounds and approach. They are an interesting and talented bunch but what is the current mindset of these CFOs and is there consistency in their experience of working within a portfolio company? The Bronzegate research team set itself the task to find out more.
Our resultant CFO survey consolidates the thoughts of over two hundred private equity portfolio company CFOs investigating four key areas: the typical background of a portfolio CFO; the CFO’s relationship with their private equity investor; the degree of alignment of expectations and the exit trajectory. The results provide some useful insight into the current perspective of CFOs and their working relationship with investors, which is so fundamental to success in private equity ventures.
THE CFO PROFILE
Firstly, exploring the backgrounds of the CFOs who participated in the survey, our results highlighted that approximately 60 per cent of private equity CFOs had previously gained sector experience that was closely aligned to their current portfolio company. Approximately 60 per cent of CFOs also had prior experience of working as a CFO within a private equity-backed portfolio company. In addition, over 60 per cent of respondents had also formerly helped sell a business, whether it was private or private equity-backed.
These figures indicate a preference for those hired into the portfolio company CFO role to have a combination of prior experience of working with private equity, managing a sale process or an understanding of the sector. The results will be no surprise to headhunters as we are often asked to deliver all three. However, the considerable number of portfolio CFOs who do not have one or more of these skills and experience is encouraging for those looking to enter the private equity arena and suggests that private equity firms and portfolio companies are prepared to look more broadly when hiring.
THE RELATIONSHIP WITH THE PRIVATE EQUITY INVESTOR
When asked how valued they felt by their investors, the response from our survey demonstrated a majority of CFOs deemed themselves as trusted and valued employees.
This is reinforced by the regularity of interaction with their investors that CFOs have experienced with almost 50 per cent interacting with them each week.
Contrary to expectations, the CFOs surveyed did not feel their private equity investors were overly hands-on with the business, suggesting a high degree of trust that is placed upon the management team. While the majority of CFOs cited a positive experience with investors, when questioned how receptive the private equity firm was to changes in portfolio company strategy as suggested by the management team, results were mixed with an overall low impression from CFOs of their ability to change defined private equity strategies.
THE BUSINESS AND THE ROLE
When asked to outline what best describes their current business, over half of those who completed the CFO survey categorised their business as “high growth” while the second highest answer was “challenged” at 24 per cent of those questioned. Only 13 per cent deemed their business to be best classified as “distressed / turnaround”. These figures suggest an optimistic outlook from CFOs towards the prospects of their current companies.
A majority of portfolio companies were described as having international operations whilst consumer/retail and TMT were the most prevalent sectors these organisations operated within. Of other functions typically managed by the CFO of a portfolio company, IT was the area which most frequently also fell into their remit with approximately a third of CFOs leading this area.
Despite the conjecture, our survey indicates private equity firms are generally not looking to sell companies quickly due to any Brexit concerns. Less than 10 per cent of those surveyed expected a sale to happen within the next 12 months with the majority expecting a sale within two to four years. Brexit only registered a marginal concern across these CFOs with over half also expecting a trade-sale as a likely outcome, with few looking at a listing for their exit strategy.
The CFOs across portfolio companies clearly enjoy the aspect of working with private equity with an impressive ninety seven percent of CFOs surveyed expecting to take on another private equity CFO assignment after their current business exits. However, not all is serene in the relationship between the CFO and their investors as more than a third felt their eventual remuneration on exit would be less than they had expected.
PEOPLE INVESTORS CAN TRUST
Private equity CFOs undertake a business-critical role for the investors and are often their trusted advisors, their “eyes and ears” in the portfolio company, capable of delivering the detail that is required. We can surmise that the current health of this key relationship is positive with CFOs engaged and optimistic about the journey towards exit as well as their relationship with the private equity firm. The strength of this relationship is related to the rigorous selection process most private equity firms undertake to appoint a CFO, which has a high degree of focus on specific experience rather than general talent to ensure the risk of any hire is minimised. This approach appears to be working well with portfolio CFOs clearly focused on driving a successful outcome for all parties.
“CFOS UNDERTAKE A BUSINESS-CRITICAL ROLE FOR THE INVESTORS AND ARE OFTEN THEIR TRUSTED ADVISORS, THEIR EYES AND EARS IN THE PORTFOLIO COMPANY”