How CFOs can transition from privately owned and listed companies to private equity companies – and flourish.
Many CFOs who’ve transformed the financial environments of privately owned and listed companies hope to break into the private equity space, especially as many are keen to take the helm of multi-year growth plans and revival strategies. In fact, few opportunities give CFOs the same chance to transform and prime a business for success as becoming the CFO of a private equity company.
However, it can be difficult for CFOs to transition from privately owned and listed companies to private equity companies. The challenges tend to be particularly demanding for a CFO in the private equity arena: borrowed capital typically means bigger risks, CFOs often have less time to achieve target results, and they’re often under intense scrutiny from investors. On top of this, some private equity companies require regular updates from the CFO so other managerial staff can play key roles in making financial decisions, too.
But a private equity CFO is often relatively new to their company (and sometimes their industry), meaning they’re unlikely to have existing relationships in the C-suite team or a legacy within the company to support them. These CFOs need a strong team in place to move ahead with forward-thinking initiatives and transformational ideas.
With these challenges in mind, here, Gary McGaghey, Group CFO of the €1.3bn end-to-end marketing production services group Williams Lea Tag, shares four strategies to help CFOs thrive in private equity companies. McGaghey emphasises that private equity challenges are much easier to address when the CFO can catch up with the economics at play, develop a strong fact base for making financial decisions, identify talent gaps in teams, and lead with transformation in mind.
1. Get to Grips With Complex Cash Flow Requirements
Though an experienced CFO will be more than used to understanding a company’s balance sheet, cash flow, and debt covenants, the economics can be more complicated when it comes to private equity companies. As debt often fuels these companies’ investments, cash flow can be particularly demanding. CFOs may need to report on cash flow weekly or even daily.
CFOs of private equity companies also often need to delve into the details of what creates value and what creates costs. They often need to examine fixed and variable costs that uncover the most important factors in a business’ operating leverage. A solid understanding of IT and cultural issues can be key to understanding critical data here.
However, often, pre-existing data reports fail to help CFOs understand a business’ position, especially as these reports aren’t always consistent. The CFO will often have to develop their understanding of the business over time, all while managing financial operations and improvement initiatives.
“I have found the most critical area of operational cash flow risk and, most importantly, opportunity, sit in the area of working capital management. Getting a robust understanding of the drivers of working capital and the levers to pull in managing it, are often sources of releasing valuable cash. Every business has opportunities to accelerate their cash cycle. The CFO’s of private equity companies need to very quickly get a firm grip on working capital through deep data interrogation, as PE owners expect quick realisation of the cash flow benefits from the optimisation of the cash cycle.”
2. Build a Reliable Fact Base
Speaking of data, when a CFO joins a private equity company as an outsider, they often need to build their knowledge of the company quickly. In an ideal world, they should use an ever-expanding, reliable fact base to uncover opportunities for value creation, especially opportunities that the company can capitalise on quickly. However, few private equity companies have large amounts of data on hand, and many lack the data analysis and tracking capabilities needed to make the most of value-creation opportunities.
Therefore, CFOs need to understand where and how to implement low-cost digital technologies to maximise benefits quickly. For example, a CFO may make targeted investments in productivity-focused tools (like cloud-based invoice-management software) to save time while improving policy enforcement and transparency. A CFO can make effective targeted investments by identifying the data initiatives that will deliver high-value quick wins without sacrificing long-term gains.
“Private equity owners have a significantly higher demand for data driven decision making. Where they lack deep industry expertise, they make up for in deep data analytics to support decision making. CFO’s of PE owned businesses need to expect robust interrogation from the PE owners when making strategic and tactical decisions, ranging from pricing decisions to investment decisions. Having access to deep data analytics with strong data driven insights is invaluable in gaining the required support from the PE owners.”
3. Build Effective Teams
Most CFOs are naturals when it comes to talent acquisition and people management. But finding the right candidates for teams can be particularly challenging in private equity companies, where management infrastructure often evolves quickly and investors need quick results. Though the CFO is usually an outsider, they must identify candidates who can lead and work under a variety of circumstances and pressures.
The CFO may also coach employees from other fields so they can work productively with the finance team. Employees who gain a strong understanding of the company’s financial position can help shift the company towards newfound, effective systems of working.
“Talent acquisition and retention is probably the single biggest challenge for CFO’s of PE owned businesses. They have to find different ways to attract and retain talent. Offering a “job for life” with a clear career path and a large guaranteed salary package, are certainly not tools at their disposal. They need to find talent that is attracted by the fast pace, broad responsibilities and a steep learning curve. Nurturing this talent requires a commitment from the CFO to commit a significant amount of time with their team to support them in a fast paced environment, allowing them to learn and develop quickly.”
4. Lead With Transformation in Mind
The CFO’s main priority in a private equity business is to oversee the company’s overall transformation. This means they must clearly define key performance indicators and manage metrics through robust – but not overwhelming – strategies.
For example, the private equity sponsor will usually identify an investment thesis and assume momentum. Meanwhile, the CFO must calculate how the company can create value on both the revenue and the cost sides of the thesis and direct resources towards the required outcome. Ideally, the CFO will manage or co-manage various initiatives to create a showcase that models the transformation the company is working towards.
“The CFO of a PE owned business needs to be able to flex their contributions to create value, ranging from securing debt financing, to making business resource allocation decisions, to driving business transformation which will realise value on exit.”
Becoming a Private Equity Influencer and Challenger
When a CFO has a firm hold on a private equity company’s finance function and an in-depth understanding of value creation, they can become both an influencer and a challenger. This is key when it comes to holding business-unit leaders and CEOs to account.
Every month, the CFO should hold business reviews with leaders in all functions. During these reviews, they should examine the factual foundation of each business activity and analyse each business proposal from an unbiased point of view. Overall, they must ensure that all investment decisions stand in line with the company’s priorities and values. This way, the CFO can become invaluable to the private equity company as they lead financial strategies, make crucial decisions, and – most importantly – generate desired results.
About the Author
Gary McGaghey is widely known as a globally experienced divisional and group CFO. Not only has he led transformation plans for several privately owned and listed companies, but he is now the CFO of the global private equity company Williams Lea Tag. Having already achieved impressive organic and M&A-driven growth for notable companies in FMCG, beverage, pharmacy, and media sectors, McGaghey is in the ideal position to apply his in-depth financial expertise to Williams Lea Tag’s transformation in the professional business services market.