The Morgan Samuels Perspective

Three Critical Attributes of Great Private Equity CFOs

Posted by Todd Wyles on Wed, Sep 27, 2017

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.  

iStock-640189368.jpgOver 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:

  1. They all have the desire and ability to be a true partner to the CEO, both internally and externally.
  2. They have command of the levers and metrics that drive value in the business, and they play a major role in executing the strategy.
  3. 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.

Metrics Driven

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.

Private Equity Practice Leader Todd WylesA 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 ofnumerous 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.

Click here to find out more about Morgan Samuels’ Private Equity Practice.

 

Topics: executive recruiters, morgan samuels, lean six sigma, human capital consultants, executive search firms, retained search firms, retained executive search firm, top executive search firms, Private Equity, PE, executive search, executive search consultants, Todd Wyles, CFO, executive search private equity

What Makes a Great Private Equity CFO?

Posted by Todd Wyles on Mon, Nov 16, 2015

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.  

unsplash_businessman_suit2.jpgOver the past three years, nearly forty percent of all the PE-backed 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:

  1. They all have the desire and ability to be a true partner to the CEO, both internally and externally.
  2. They have command of the levers and metrics that drive value in the business, and they play a major role in executing the strategy.
  3. 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.

Metrics Driven

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.

Private Equity Practice Leader Todd WylesA 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 successful CFO searches for PE-backed companies over the past few years, and we have found that candidates who possess the criteria described above thrive within the unique demands of private equity.

Click here to find out more about Morgan Samuels’ Private Equity Practice.

 

Topics: executive recruiters, morgan samuels, lean six sigma, human capital consultants, executive search firms, retained search firms, retained executive search firm, top executive search firms, Private Equity, PE, executive search, executive search consultants, Todd Wyles, CFO, executive search private equity

It's All About Relationships

Posted by Morgan Samuels on Mon, Mar 24, 2014

The January issue of PE Manager includes expert commentary by Todd Wyles about the importance of PE firms proactively building and maintaining their own pipelines of executive talent. As the bar for human capital talent in private equity is exceptionally high and the competition for top talent is fierce, Todd makes the case for PE firms to devote the time and energy to create and sustain their senior executive networks in a systematic fashion.

Todd is the Private Equity Practice Leader at Morgan Samuels. In addition to his own experience, Todd interviewed senior leaders at Friedman Fleischer & Lowe and General Atlantic to get their perspective on why and how they work at building a strong bench of potential talent. Download the article for some thoughts on how to succeed in the ongoing battle for rock star talent.

Download

Topics: morgan samuels, human capital consultants, Private Equity, PE

A New Front in the War for Talent?

Posted by Morgan Samuels on Thu, May 23, 2013

Todd Wyles Morgan SamuelsThe May issue of PE Manager includes a piece by our firm's own Todd Wyles on how private equity firms approach talent management across their portfolios. Increasingly, PE firms are adopting an Operating Partner in charge of Talent or Human Capital to help facilitate executive hiring at their portfolio companies. Todd interviewed several Heads of Talent, including leaders at Genstar Capital and Welsh, Carson, Anderson & Stowe to learn how they create value.

Todd is the Private Equity Practice Leader at Morgan Samuels. As a human capital consulting firm, we are always enthusiastic about putting a focus on talent issues. We think the emergence of the Head of Talent role at PE firms is a positive development in the private equity space for reasons outlined in Todd’s commentary.

Click here to Download

Topics: executive recruiters, top executive search firm, morgan samuels, lean six sigma, human capital consultants, executive search firms, retained search firms, retained executive search firm, top executive search firms, Private Equity, PE, executive search, executive search consultants, executive employment agency, Private Equity International, Magazine, Head of Talent, CHRO, Todd Wyles

The 10 Commandments for Successfully Hiring Portfolio Company Executives

Posted by Morgan Samuels on Thu, May 31, 2012

Struan Scott

Morgan Samuels Senior Client Partner Struan Scott, who leads our Private Equity practice, is featured in PE Manager’s May issue.

The 10 Commandments for Successfully Hiring Portfolio Company Executives

PE Manager | MAY 2012 | Issue 93

“I don’t know if the CEO is going to make it. I am going to give her a few more months to turn it around.”

“For one of my portfolio companies, I have had to change the CEO three times in five years; company performance is significantly lagging expectations.”

“The CEO was a disastrous hire. He was a terrible culture fit; we didn’t do a good job of assessing him.”

I hear similar horror stories from private equity professionals on a weekly basis. Fortunately the solution to these issues is easy. Private equity firms need to view hiring as a deliberate, strategic, and rigorous process. This will enable firms to hire “rock stars” who will drive phenomenal portfolio company performance.

Consider the following 10 commandments to achieve human capital success:

1.  Hire a senior resource dedicated to human capital issues. GPs embrace creating centres of excellence for IT and Procurement. The same should apply for HR

Human Resources isn’t as easy as it sounds. Often portfolio companies do not have the resources to hire and develop world class HR talent. Some private equity firms have hired former Fortune 500 chief human resources officers. Others have hired former senior retained search professionals. And some firms have a COO skilled in HR who works closely with portfolio companies. Best in class firms leverage this HR expert to lift the performance of the executives and HR leads within the portfolio companies. Best practices will often be shared across companies informally or through regularly scheduled events. They also drive improved performance through better organisational design, compensation, executive coaching, hiring, etc.

2.  Before you launch a search for an executive, develop a clear understanding of the critical drivers of success

Determine which sort of leader is appropriate for this stage of your business. For example, for a turnaround a command and control style might be more appropriate than an empowerment leadership style.

What is unique about your culture? What sort of executive will be effective? What sort of person will be motivated to tough out the hard times?

Develop key metric driven objectives that the hired candidate will need to achieve in the next 24 months. Understand that just because a candidate has delivered similar objectives in the past does not mean they will be successful at your company – leadership acumen and cultural fit are crucial.

When you have hired your candidate, use the key drivers of success to accelerate a quick start and monitor progress.

3.  Ensure all key stakeholders agree on the key drivers of success

Sponsors as well as key levels of management should agree what a great candidate will look like before you start your search. This is particularly important for club deals.

4.  Develop a system to track the performance of each senior level search conducted at every portfolio company and adjust your hiring strategies accordingly

I recently spoke with two of the largest private equity firms about their approach. One tracks the type of search and the fee charged and they are noticing they have been awarding searches to a recruiting firm that charges the lowest price even though the performance of the executives placed has been terrible. Another has been tracking the number of searches each recruiting firm has done and they have been awarding searches based on the number of searches previously awarded even though the performance of the executives hired has been woeful.

5.  Avoid getting burned by retained search firms. Key questions to consider:

  • Does the firm show you their most senior partners and “bait and switch” with junior resources?
  • Does the search firm view this search as importantly as you do?
  • What is the firm’s closure rate? Some of the best known search firms only successfully close around 80 percent of their searches.
  • How quickly do they close searches?
  • What other private equity firms have they worked for? Reach out directly to these other firms for validation of value provided by the search firm.
  • Does the firm offer flexible pricing based on their and/or the executive’s performance?
  • Do they listen? What is their process for understanding your portfolio company’s strategic business objectives and culture? Many search firms will take your position description, tell you they know what you need, disappear for months, return with some candidates, and tell you to pick one.
  • Do they truly conduct original research? Some will tout their large database and research capabilities only to end up just recycling resumes.
  • How do they attract candidates? Don’t just go off the perceived status of the firm’s brand.
  • Can they demonstrate a combination of science, art, and resources in their approach to assessment? What are their assessment strategies? Don’t rely on people who say “Trust me – I have been interviewing for 30 years.”

6.  Be thoughtful and strategic about how you interview candidates. “Gut feel” doesn’t usually work
Craft behavioral interview questions to understand:

  • How the candidate will meet key objectives for the role
  • Cultural fit
  • Track record and how it was achieved (e.g. have they always had a strong brand name and resources to help them)
  • Motivation
  • Potential derailers (e.g. pressure from family and friends not to relocate)

Create a feedback process – once the candidate has been hired, look over your notes to see trends in how good and bad hires answer questions.

7.  Ask your finalist to present their plan for how they will meet the key objectives for the role. If you don’t like the plan, don’t hire them

8.  Be thoughtful about references

Combine references provided by the candidate with “blind” references. Ensure the people providing the references understand the key objectives for the role and the company culture. Talk to supervisors, peers, reports, clients, etc.

9.  Continue to assess your finalist.

Be wary if your finalist demonstrates high ego needs. Pay attention to how they negotiate their offer. If they are selfish and overly demanding, you should walk away.

10.  Don’t underestimate the importance of executive coaching.

A private equity human capital-focused operating partner recently shared that the COO at one of his portfolio companies performed very poorly for the first year. The COO overanalyzed everything and couldn’t make a decision. The operating partner started coaching the COO. He also guided the CEO on the best way to manage the COO and in a few months the COO became an exceptional performer.

If you use the same level of rigour in hiring as you do when purchasing companies, your hiring success can only improve. The right human capital strategy can be the difference between a fair return on investment and an exceptional one.

Struan Scott leads the private equity practice at Morgan Samuels, a human capital consulting firm focused on retained executive search.  Struan can be reached at [email protected]

Topics: human capital consultants, retained executive search firm, Private Equity