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How to survive -and thrive- as a Private Equity CFO (Kevin Reed guest contribution)

23rd May 2017

The world of private equity (PE) can seem a mysterious one, cloaked in secrecy. Accountants considering a career in PE may have even heard this: ‘You need PE experience to get a PE role’. In other words, it can seem impossible to lever yourself into the sector in the first place, let alone perform there successfully.

But is it that difficult to find your way into? Are the disciplines, attitude and experiences you have gleaned in your career the right match for PE? Fundamentally, is being a CFO in the private equity world any different to that of owner-managed businesses or those listed publicly?

Venture capital versus private equity – different approaches

It is, perhaps, best to start off by distinguishing between the two basic equity funding models. Firstly, venture capital (VC) investors tend to get involved at an early stage of a company’s development, and will hold many small stakeholdings – and by definition of the nascent nature of their investment choices, they will be high-risk.

Private equity investments are often a 100% stake, made in far fewer businesses who are more mature in their lifecycle. These investments are usually lower risk-versus-return than in VC.

One route into this world is to be involved in an early-stage company, and you may also be early into your finance career.

Richard Matthews is a director at Augmentum Capital, a venture capital firm that backs entrepreneurs and businesses looking to lead their industry.

Matthews, a former CFO himself, says that startups looking to disrupt and grow quickly into their markets don’t tend to have a senior financial chief in place, instead they are generally at ‘controller’ level.

But this controller will have an “important role” to play in managing the small company’s back office, freeing up the CEO to add value. If the product or service being provided is ‘financial’ in nature, that controller may also be involved in providing further strategic and practical input.

Learning the trade from another CFO

However, it’s possible that the ‘CFO hat’ may well be worn by someone else, Matthews adds. A fundraising phase, which may involve equity, is such an important event that a more senior, experienced figure is likely to be parachuted in at board level to manage that process.

“There are some very good controllers. We’d ideally like to see that person stay throughout – maybe not as the first CFO of the business, but perhaps the second one.”

This is how the controller learns the ropes, Matthews suggests. “The controller working alongside the more experienced person - they see what the role entails.”

Sanjay Bowry has served as a finance professional for ten years – and since 2016 has been the CFO of consumer data licensing startup people.io. It has successfully run a series of equity funding exercises, convertible loans, and is part of Telefonica’s global accelerator Wayra Deutschland.

To successfully launch and gain funding, Bowry flags up the CFO’s approach.

Representing the company, respecting the financials

Firstly, you have to “find a balance” between your support for the company vision, but also make sure the vision you want to project fits with the financials. At that point you can sell the direction – and financial projections – to investors. “You have to understand how the numbers apply to the plan,” he says.

Bowry concurs with Matthews that accountants in startups must take on a broad range of roles and responsibilities. “You’re structuring deals but running different parts of the business as well,” says Bowry. “What is best for the investors, but also the team? Don’t forget, equity can continue to be held by the founder and other staff as well.”

From a technical and strategic standpoint, Bowry advises that the CFO must build the financial models towards the aspirations of the business, while keeping a close eye on cash flow.

So, we now understand what VCs expect the skillsets and experience levels to be of a startup’s accountant. Now is the point to discuss the expectations of PE, and how that translates to the day-to-day running of finance by the CFO.

Chris Merry and Adrian Gardner, both chartered accountants, are CEO and CFO respectively of fund administration services provider Ipes. Not only are they executives experienced in different business models, but Ipes’ offering is aimed at PE clients. As if that’s not enough, Ipes is, itself, owned by PE firm Silverfleet Capital. As such, they are uniquely placed to talk about the expectations of PE upon the CFO.

Stakeholder management versus regulatory reporting

A fundamental aspect of PE ownership is that they tend to work to different cycles than, say a listed company, where public proclamations of the business’ revenues and profits, driven by rules and regulation, are often made on a quarterly basis.

“In private equity you can work on your plan ‘in private’, and don’t have to stick to the same cycles of reporting,” says Merry.

However, those who think this means less scrutiny will be very much mistaken. Gardner says that there is much more reporting and exposure to PE owners – who will usually be represented on the board.

However, the owner will have a long-term goal to be achieved, and will appreciate that sometimes the best way of creating value is not by linear incremental annual growth – as long as the company delivers on its pre-agreed strategy and achieves milestones towards the overall goal in the desired timeframe.

Getting close up and personal with the owners

“A PE portfolio manager will likely have a relatively small number of live investments, so he or she gets to fully understand all the mechanics of the business. This is true to a much lesser extent in a PLC where a portfolio manager has many more portfolio companies, typically has no board seat and has less access to detailed information. Further, a PE manager may well have a longer-term view of how value is created whereas in a PLC there’s a considerable expectation of incremental growth in profitability every reporting period,” explains Gardner.

“If a business needs some change it’s much easier to ‘step back’ – they’re not as interested in earnings growing if you can create value later on. If you’re then looking at a buy-and-build strategy, how do we reposition something that allows us to gain incremental value?”

A PLC’s strategy is set by the board, and reported to a myriad of stakeholders, where PE sits on the board and is intimately involved in strategy creation. “It’s ‘their’ business,” Gardner adds.

A CFO in PE must appreciate that a detailed understanding is required of the business’ position – and that detail can be requested from the PE owners at any point.

Get the data…analyse

David Tilston, currently interim CFO with Consort Medical, has operated in most types of business ownership model. For him, there are key aspects to consider.

Firstly, a private equity CFO must understand the timescale that the return on investment has been aligned towards, and how the PE firm expects value to be created. This is fundamental.

In line with Gardner’s thoughts, Tilston expect the owners to be “very data- and analysis-hungry”. “As a PLC FD you’re master of your own destiny. With a PE house, they will be engaged with you, perhaps even conversing on a daily or weekly basis depending on the circumstances.”

Smoothing the sale process

Preparing for the business’ subsequent sale is a key aspect in making yourself popular with the PE community. Being able to communicate with the potential new owners during the due diligence process will impress both parties – buyer and seller. Performing well at this stage could see your previous bosses want you to join their next venture, or the new owners might want you to stick around.

In summary, you must be able to drive the business forward in line with owners’ strategy; produce high-quality information and analysis at short-notice; and show the capability to be central to the sale process.

Ipes’ Gardner concludes: “A good CFO’s a good CFO – most of the disciplines are common. A good CFO will care about stakeholder management and be responsive to them. In PE the stakeholder management’s different around the level of engagement and interaction. But you’ll succeed if you’re sensitive to the requirements, and the levels of engagement and discussion.”

Kevin Reed is a freelance journalist and former editor of Financial Director

Harmonic Note from Founder, Charlie Walker:

A good CFO can adapt to dealing with a multitude of stakeholders, however, a point of frustration for PE investors looking to hire can be that CFOs underestimate the extra scrutiny they will face.

Although our PE clients, in my experience, display a perfectly reasonable level of patience with their portfolio businesses, they are also clear at the outset of any investment that performance targets must be met. If these aren’t delivered, the CFO is placed under a level of pressure which isn’t experienced in owner-managed businesses for instance. Failure or stagnation isn't an option!

One of the key ‘value-adds’ of a PE owner/investor is to drive efficiencies in operational process. Some of the innovation from these firms is staggering and really supercharges growth rates. That said, this often involves vastly complex systems implementations, data migrations and business change programmes. This change will, in part, land on the CFO’s plate. They may have an army of people around them to deliver these projects, but it takes a unique person with a very organised and strategic outlook to deliver successfully.

Despite the shadow of Brexit looming, we have found demand for CFOs with PE experience to be very robust. The fact that accountancy practices are also increasing headcount once again in their transaction services divisions (many of them with a specific PE-focus) is also a positive sign.