For private equity investors, ensuring they have the right CFO is widely thought to be the most critical decision they will make from a talent standpoint, second only to installing a top CEO.
Over the past three years, nearly forty percent of all the PE-backed executive searches Morgan Samuels has conducted have been CFO searches. Why is this search such a common one throughout the investment cycle? Is there a common profile for the best CFOs? And if there is, what are the specific attributes that are most often observed?
In an attempt to answer these questions, Morgan Samuels has captured and analyzed extensive quantitative and qualitative data from CFO searches we have conducted for PE-backed businesses ranging in size from $8M - $75M EBITDA, across multiple industries. By culling the data collected from assessing hundreds of chief financial officers for these searches, we have identified three critical attributes of great CFOs for PE-backed companies:
- They all have the desire and ability to be a true partner to the CEO, both internally and externally.
- They have command of the levers and metrics that drive value in the business, and they play a major role in executing the strategy.
- They are hands on, decisive, and they have a very high sense of urgency.
Let’s look at each of these characteristics in more detail:
True Partner to the CEO
This may appear to be a relatively soft attribute and difficult to measure, but based on our experience a CFO must not only fit the culture of the portfolio company, but also the style and vision of the CEO. And they must simultaneously focus on both the internal and external aspects of their position.
One of the reasons the CFO role is so critical to get right at a PE-backed company is that they must have the skills and ability to advance the vision and strategy of the CEO, across multiple functions. They need to be able to translate the financial impact / projected outcomes of the strategy across the organization. This is the internal aspect of becoming a partner to the CEO.
Additionally, they must be focused externally. They need to manage banking relationships and ensure covenants are not broken. They often own multiple professional service provider relationships. Perhaps most importantly, they have to be comfortable serving two masters – both their CEO and also the Board which will typically include at least one senior member of the GP. And when it comes time to exit, the CFO plays a major role in interfacing with potential buyers, which requires both strong presentation skills and the ability to influence buyers.
Cash is King is a trite anecdote. But for many middle market private equity-owned companies, it is still a very relevant mindset. Most control investments are levered such that the management team has to be extraordinarily thoughtful about how they manage cash to ensure growth (whether that be organic, or via acquisition) and liquidity. The CFO is at the tip of the spear regarding cash management.
One CFO we recently placed at a $150M business services company recognized within about 30 days on the job that the company was going to run out of cash 60 days later! The CEO and the Board were not as aware of this, and so the very first order of business for this CFO was to create a set of metrics/KPIs that provided visibility for cash management on a daily basis. That is how critical managing cash can be for a midsized business, and CFOs who install systems to ensure this happens are the most successful.
Hands on and Decisive
One of the most striking differences we have observed in successful CFOs for middle market companies with private equity owners is that they truly appreciate (and accept) that resources are at a premium, and that time is of the essence. Very few CFOs in private equity enjoy the resources (both from a staff and budget perspective) that their counterparts in the marketplace have. Similarly, they do not have nearly as much time to create value for the PE-backed business, with an exit often only a few years away. Being willing to get their hands dirty—and do it quickly by making great decisions (often without as much information as they would like) are hallmarks of the most effective private equity CFOs.
A private equity firm’s greatest asset lies in its people and their capabilities to deliver across a myriad of stakeholders’ expectations. Top talent that is a great fit for private equity is extraordinarily scarce across the board, and finding the right CFO is especially critical to success. We have conducted dozens of numerous successful CFO searches for PE-backed companies, and we have found that candidates who possess the criteria described above thrive within the unique demands of private equity.