What every CFO needs to know about private equity

by Jim Etling
Senior Vice President at Charles Aris Inc.

You stare out your office window, replaying a conversation with a colleague during last night’s CFO networking meeting. You’ve known her for years; your careers have paralleled each other’s; and you think she’s a great CFO – certainly not better than you but a great CFO nonetheless. You’re still reeling from the bombshell she dropped!

For the past four years, she’s been the chief financial officer of a private equity-owned portfolio company that was just sold to a large strategic buyer. How did that happen? Did she casually mention a substantial liquidity event? Did she say low seven figures? How do I get a role like that?

I have a confession to make. As a private equity portfolio CFO for a number of different P.E. firms in the past, and now as a search professional specializing in placing CFOs in companies owned by P.E. firms, I’m a big fan of private equity. I love the people, I love the pace, and I love the unlimited variety of companies they invest in. I especially love the CFO position in a portfolio company and think it’s one of the most important and toughest jobs in business. When I speak with CFOs who have never been in portfolio, they always want to know what it’s like. What can they expect? What do they need to know about private equity and the portfolio CFO position to help them become successful in that world? Here’s what I tell them:

You get no extra credit for having a world-class financial background.

It’s expected. It’s the ticket to the game. You’ll create, grow, improve, manage and run a world-class finance and accounting department. You’ll close your books in single-digit days; financial statements will be accurate and timely. You’ll collect cash promptly, everyone will be paid when expected and the banks will be happy. Audits will be completed on time with no adjustments. Everything ticks and everything ties and that is the expectation.

You have two bosses … two very important and demanding bosses.

A major tripwire for CFOs in portfolio for the first time is the challenge of understanding and navigating the reporting relationship with their CEOs and private equity partners. You’ll report directly to the CEO of your company, who will expect your undying loyalty – as that executive should. Having said that, the reporting relationship to the private equity firm isn’t dotted; it’s as solid as the solid line to your CEO. As CFO, you’re the financial steward of the P.E. firm’s investment, and the firm’s leaders will look to you to keep them up to date about anything that could put their investment at risk. Issues will develop – issues which your CEO likely will expect to remain local and not shared with your P.E. partner. If so, some of those issues will require you to share them with your P.E. partner. Knowing what and when and how isn’t always easy but it’s essential. The recognition of this unique reporting relationship and the skill to deftly navigate it is key to being a trusted portfolio CFO.

There will be an exit and you may lose your job.

It’s no surprise that when people are asked about their biggest job-related fear, one of the common responses is that their company will be sold. As a portfolio CFO, it’s your job to make sure there is an exit and that ownership of the company is transitioned. Whether it’s sold to a strategic buyer, to another P.E. firm, or taken public, it’s your duty to do everything in your power to make sure that those two objectives happen and to maximize the results. Your risk profile needs to include the very real probability that you’ll do everything right, perform at the highest level, succeed in everything you do and, as a result, lose your job. It comes with the territory but it also comes with a liquidity event. More on that below.

You’ll be a strategic partner to your CEO and leadership team.

This isn’t a bean counter or chief accountant type of position. All the blocking-and-tackling finance and accounting must be complete, accurate and timely, but the true value you’ll bring is as a strategic business partner to the company. You’ll be the CEO’s right hand, advising, directing and challenging her to drive the portfolio’s growth. I recently heard it said that CFO is the only position, except for CEO, with a complete view of every function and aspect of a company. This is especially important in portfolio, where your reach touches every department, person and decision in the organization. The best portfolio CFOs understand the business and help make history, not just record it.

It’s a fast-paced life.

When we begin a new search for a CFO, I always ask the P.E. firm’s leaders when they plan to exit the investment. The most common answer is three to five years. Some firms hold an investment longer, some shorter, but most fall into this range. It’s important to understand just how short three to five years really is, and how much needs to be done in such a short period of time. Minimally, the company will need to double or triple in size in conjunction with a significant increase in EBITDA. There will be a new ERP system for you to select and implement. There will be bolt-on acquisitions to evaluate and close. There will be staff to hire and bring up to speed. There will be lenders to manage and debt to reduce. There will be an exit to prepare for and successfully complete – all in three to five years. It sounds daunting and it is, but it’s exciting. There’s no time to sit still and it’s one of the things I loved about being a portfolio CFO. Did I mention I loved the pace?

There will be an exit and you’ll participate in a wealth event.

You’ll come in and you’ll work hard. You’ll navigate challenging relationships dealing with multiple hard-charging, Type A personalities. You’ll take a great/good/challenged business and grow/improve/turn it around, creating true value for the company’s employees, its customers and suppliers, and its owners and investors … including you. You’ll think like an owner because you are an owner. It may be the first time in your career that you’ve had this type of opportunity, or the most recent in a string of successful exits, but it’ll be rewarding. Your successes may have put you on the street, looking for your next job, but another portfolio opportunity will be out there for you and you’ll be going after it with money in the bank.