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What Makes an Ideal Private Equity CFO?

Updated: Nov 19, 2019

As private equity firms within the San Francisco Bay Area, Silicon Valley and also nationwide, look to maximize the value of their holdings, CEOs and small business owners are increasingly bringing in experienced outsourced CFOs early in the lifespan of their investments.

The ideal private equity Chief Financial Officer is both strategic and operational, serving as a thought partner across various functional and divisional aspects of the business while implementing the systems and processes to help the company get to an exit.

A strategic CFO will be growth-oriented in terms of increased profit and effective organizational scale, with a focus on actively planning for the future, rather than viewing the business process in hindsight, as controllers most often do. An operational CFO will often oversee multiple functions beyond finance, most notably operations, but also information technology, legal, human resources, real estate, and supply chain.

In private equity-backed companies, the CFO is often viewed as the conduit of information to the financial sponsor — clearly communicating complex financial reporting, working through capital structure issues or M&A opportunities, and generally speaking the parties’ common language of finance. Therefore, private equity firms tend to be quite influential in the CFO selection process, even though the ultimate decision typically resides with the portfolio-company CEO.

CFOs have varied expertise with accounting/controllership, business/operational finance, and capital markets/treasury. Those who excel in business and operational finance will have honed their skills in divisional finance or financial planning and analysis.

While all three areas of focus are important, we argue that business/operational finance is often the most critical priority for private-equity CFO roles, given the need to provide decision support across a range of dynamic operational and strategic initiatives.

While technical accounting skills are important, the ability to manage a controller while having a firm grasp to ask the right questions is invaluable to long-term business success.

More often than not, private equity firms seek to fill portfolio CFO roles with executives who have enterprise-level CFO experience. They will have had full ownership of the finance organization across all functions (audit, tax, treasury, FP&A, etc.) and will have interfaced with a board of directors on strategic matters.

Conversely, a divisional CFO may have relied on a shared-services infrastructure to manage other finance areas. Additionally, a divisional CFO may have managed his/her business to only a certain level of profitability, focusing on, say, gross profit rather than operating income or cash flow.

That said, there are many situations in which an experienced divisional CFO can offer just as compelling a skill set, if not more so, as an enterprise CFO. For instance, divisional CFOs from certain large corporations have operated their businesses with a similar level of accountability as that of an independent company.

Additionally, divisional CFOs from top business schools with experience working with best-in-class organizations often bring a highly strategic and operational approach to the finance function, which is integral in partnering with the business to drive growth and profitability.

In fact, the ideal portfolio-company CFO combines knowledge from having worked in a larger organization with the entrepreneurial drive required to be successful in a smaller environment.

Not every CFO candidate combines both categories of experience, but for those who have worked only at larger companies, the nature of their progressive roles can offer evidence of entrepreneurship. For example, many finance executives who have rotated through emerging-market regions of large multinationals have worked in low-resource environments, where the abilities to adapt and take a hands-on approach are keys to success in the role.

It seems logical that private equity firms should source portfolio-company CFO candidates from within the same industry, bringing knowledge of the competitive landscape, relevant performance metrics, and instant credibility to internal and external stakeholders.

Highly regulated industries, such as financial services and health care, often require a CFO with knowledge of sector-specific regulatory nuances. In a world driven by internal rate of return, time is always of the essence, so the ability for an incoming CFO to get up to speed quickly is critical.

Yet, companies often look beyond their industry to recruit top finance talent, perhaps more so than with any other corporate function. When and why does that make sense?

First, a particular industry or sector may not yield strong talent within the finance function. Some sectors, such as consumer packaged goods, are renowned for breeding best-in-class finance executives, while a creatively led industry such as fashion may place less emphasis on the finance function.

Moreover, bringing a CFO from outside the industry may bring a certain level of objectivity and freshness that can be helpful in thinking about different ways of operating the business.

Finally, companies sometimes look for CFOs who understand certain operating characteristics of the business without necessarily coming from the industry. For example, a consumer manufacturing business that is struggling with supply chain issues may look to hire an industrial CFO who understands plant operations and vertical manufacturing, irrespective of consumer products experience.

How important is prior PE experience for an incoming portfolio-company CFO? The answer varies by sponsor, with some saying it’s a “nice-to-have” and others insisting it’s a requirement.

Certainly, someone who been CFO of another private equity-backed company will be familiar with dynamics such as operating in a levered environment, maintaining a relentless focus on cash flow, driving operational excellence, communicating with a private equity board, and knowing what information is needed and when.

While industry background and technical abilities are important, to a large extent they are table stakes. What really distinguishes one candidate from another are their leadership competencies, which should be well aligned to the sponsor’s investment thesis.

First among these is performance orientation, which is, not coincidentally, one of the central business priorities of private equity investors. This competency is characterized by a high sense of urgency, a bias for rapid change and continuous improvement, and a strenuous avoidance of negative surprises. From a financial perspective, the CFO’s performance orientation manifests itself as a track record of consistently delivering significant year-over-year improvements in financial results.

However, not all results are achieved equally. Some may require deep cost cutting, and others strategic growth initiatives. While a turnaround situation will require a more surgical approach, most private equity investment theses require the company to grow and evolve.

In these instances, the successful CFO has a “build” mentality and aligns the team appropriately to drive major change management initiatives, bringing a willingness to challenge existing ideas and facilitate continuous improvement.

Successfully driving change will require the CFO to influence the firm’s decision-making process, drawing upon not only his or her functional expertise, but also demonstrated leadership, initiative, and collaboration. The ability to build relationships across the organization and position finance as a business partner will enable the CFO to provide effective decision support.

Importantly, the CFO must be able to collaborate with the CEO as a strategic thought partner, aligning around a shared vision for the organization and shaping the finance strategy in support of the company’s business objectives. A strategic CFO is creative and capable of thinking broadly about business issues — not just financial ones — in order to contribute to the bigger picture. Strategic orientation is particularly relevant when the investment thesis calls for inorganic growth.

Finally, the successful CFO is a strong team leader, with a track record of building high-performance finance teams and enhancing shareholder value.

In conclusion, the ideal CFO thinks like an owner, bringing entrepreneurial spirit, a hands-on approach, and a clear and timely communication style. He or she knows what long-term success looks like in the contexts of both a best-in-class finance organization and delivering value through a successful exit.

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