Many chief financial officers (CFOs) view the opportunity to lead the finance departments of private equity-owned companies as a big win. It looks excellent on a resume and tends to come with a nice salary bump.
But CFOs of PE-owned companies face a tall order. They are tasked with transforming performance, implementing new processes, and driving growth. And most of the time, they have to do this with a smaller finance team.
To help make the transition smoother, we outline three things private equity operating partners and executives want CFOs to know.
Open Communication Is Key
Once a company has been acquired by a PE firm, the CFO’s role necessarily shifts in a number of ways. One thing that PE firms expect from their CFOs is great communication. More than ever, a CFO must be available for ongoing conversations and open to managing the results of those conversations. The more open CFOs are during this process, the more likely they’ll succeed in their new roles.
CFOs must also adapt their communication styles to accommodate the communication styles of the leaders and boards of private equity companies. Consequently, CFOs must communicate more actively and focus their conversations on that which the PE-owned firms deem important. CFOs who don’t focus on the needs of the board and don’t proactively communicate with board members about those needs will most likely fail.
A PE operating partner’s role can differ greatly between private equity firms and their portfolio firms. Many times, CFOs don’t totally grasp what the operating partner has to offer, which is why CFOs have to engage in open communication with those partners. They need to ask their operating partners about the resources available so that they can fully understand the tools at their disposal.
Additionally, CFOs shouldn’t be afraid to push back when operating partners or other private equity executives request certain information. For example, if an operating partner requests a report that will take a long time and a lot of man-hours to compile, it’s OK for the CFO to ask why the partner needs the numbers as well as what the PE firm is trying to accomplish.
The CFO should let the executives know what is required to give them the information they requested so all parties understand the resources necessary to produce the report. It may be that time and effort would be better spent on other work, especially if the executives are asking for data that could be included in a regular report.
Success Requires Wearing Many Hats
Private equity CFOs have to be flexible and wear many hats. Before a company is acquired by a PE firm, it might be perfectly acceptable for the CFO to simply fill the accountant role. However, after the company is acquired, the role must expand. A PE CFO must understand how to strategically grow the business. And a lot of the time, the CFOs are given more duties to meet the increased needs of the private equity company.
CFOs of PE-owned companies must work closely with their CEOs to provide consistent and accurate financial reporting and data analytics. It’s pretty common for CEOs and CFOs to miscommunicate and offer contradictory information to private equity investors, which does nothing to inspire confidence. To be successful, the CFO must work with the CEO to provide the board with reliable information that accurately depicts the state of the business at any given time.
In addition to overseeing the finances of the private equity firm, the CFO may also be required to take on roles in other areas of the business, including operations, supply chain management, legal, human resources, and information technology.
However, many CFOs that came to private equity firms when their organizations were acquired don’t understand how to adjust to the new duties required by their PE firms, which is one of the reasons for the high rate of CFO turnover at private equity firms.
To be successful, PE CFOs must acknowledge that their new firms have higher expectations of finance chiefs and, as such, the CFOs must adapt to their new duties. For that matter, they must also be forward-thinking and aspire to grow personally and professionally.
Technology Is a Strategic Investment
In many of the midmarket and midsize private equity-owned firms, the CFOs wear a lot of hats, including one that requires them to oversee the technology infrastructure.
PE-owned firms have to comply with stringent financial reporting requirements, which means they must stay up to date with the latest technology to operate efficiently and stay competitive in a rapidly advancing industry. In fact, 82% of private equity investors believe automation and technology will have a major impact on finance functions in the next seven or so years, according to the 2019 Deloitte survey.
PE CFOs must make strategic investments in technology to improve business processes. Eventually, these investments should enable private equity-owned firms to cut employee costs and guarantee more efficient workflows.
Private equity CFOs must embrace and adopt digital technologies and replace legacy financial reporting methods with automation. And they must do everything they can to ensure that technological advancements are part of their strategic plans for their PE-owned companies.
Not very many PE-owned companies have good data that they can easily access. What’s more, they typically don’t have the data analysis and tracking functionality they need to identify opportunities to control costs and improve operations. As such, CFOs need to invest in the technology that will give them access to critical data so they can glean insights into which activities are bringing in money and which are draining profits.
The role of the CFO shifts after a company is acquired by a private equity firm and keeping up with the demands of that new role can be challenging.
The skills and knowledge that enable CFOs to be successful in more typical organizations become table stakes in the world of PE-owned companies as investor scrutiny is more intense and the time to show results is shorter.
To be successful, CFOs at PE-owned companies must frequently communicate with their CEOs and board members and provide them with the most-up-to date, accurate information, take roles in business units outside finance, and make strategic investments in up-to-date technology to move the company forward.