Immense pressure and incredibly high investor expectations: for a PE backed CFO, these are the perils that come with the role, and the window of time in which they have to drive value is growing ever narrower by the day.
According to a study from Deloitte into the turnover rate of Chief Financial Officers in PE portfolio companies, it was revealed that nearly three quarters of PE investors will replace CFOs who do not grasp the importance of their role in driving value – with many investors replacing 1 in every 2 of their CFOs within 18 months of investment.
With their focus firmly fixed on the exit, the intensity of the Chief Financial Officer in a Private Equity portfolio company is driven by the heightened risks and rewards of success or failure. However, amidst a chaotic geopolitical landscape and unprecedented technological change, concerns regarding market conditions and exit readiness are weighing on PE-backed CFOs.
To meet the growing level of demand, PE firms will typically bring on a new CFO during the early stages of investment to enact positive change and spark growth as quickly as possible. If the CFO is not equipped to drive operating excellence in a tight timeframe and demonstrate considerable progress to the private equity board, they will fall short of expectations and soon be replaced.
While the role of the CFO has evolved across the board to become more strategic advisor than Finance manager, the link between the objectives of the PE firm and the successful transformation of the company comes with its own set of unique challenges.
Conventional CFOs generally report to the CEO of a company. Given the multiple stakeholders involved in a Private Equity backed business, the CFO must be able to manage expectations on both sides, communicating plans, performance and objectives in a manner that leaves no room for misinterpretation.
Operating at a portfolio company as opposed to a conventional organisation makes for a challenging landscape; the CFO must not only understand the nuances of the specific industry in which they operate but the unique nature of the private equity market and the pitfalls it presents.
Due to the comprehensive reporting requirements in this environment, CFOs must act as the common link between the private equity board and the purchased organisation. With their attention and time already split between managing parallel demands, the finance chief must also manage banking relationships effectively and act as a strategic partner to owners and senior management teams.
CFOs in a private equity backed business will have been selected by investors with a specific objective in mind. Whether it’s to supercharge company growth or prepare the company for sale, there’s a good chance the CFO will be required to work relentlessly to achieve this target.
As responsible as the Chief Executive Officer may be for ensuring the necessary resources are readily available to enable the leadership team to succeed in their respective roles, CFOs preparing a company for exit typically expect PE professionals to offer their own expertise and competencies by way of guidance. Despite good intentions, findings from Deloitte’s 2019 study show a desperate lack of support from PE firms in this department, in most cases due to the limited time they have to dedicate to such tasks.
The ability to produce granular analysis across all aspects of financial performance on both a proactive and reactive basis is the bread and butter of a CFOs remit. However, when it comes to PE investment, the urgent need to drive return value puts CFOs under significant pressure to deliver strategic insights from large volumes of data.
Be it measuring the profitability of individual jobs, weighing the impact of organic versus acquired growth or assessing working capital trends, PE-backed CFOs understand the role that rich data plays in guiding the decisions of future buyers through the due diligence process. Those unfamiliar with the environment, on the other hand, may find the level of information that they are required to unearth overwhelming to say the least.
Above all, investors want certainty. Gaining a clear picture of how the company is currently performing against the investment strategy is critical, but what new CFOs in Private Equity portfolio companies can often fail to deliver is an accurate view into the forecast performance against the investment plan.
In addition to monthly management information, PE investors require CFOs to uncover insights on future performance from historical data that can be transformed into actionable insights; they demand a detailed view of any anticipated variances on the business’ costs, liquidity and cashflow and should be the first to know of any divergences. A lack of certainty on estimated financial performance or unpredictable costs can prevent management and investors from ensuring exit readiness.
Though a necessity for any CFO, keeping a handle on the company’s overheads is a requirement that PE-backed finance departments must double-down on in order to deliver quarter on quarter EBITDA growth to ensure a healthy future valuation of the business. In light of investor scrutiny, CFOs of portfolio companies must ensure each and every outgoing is justifiable and that the return will be worth the outlay.
Unfortunately for many, this has meant cutting back on essential legal advice and assistance due to the lack of cost predictability. Since most traditional firms are set up to bill by the hour even for minimal tasks, it becomes hard to justify seeking legal support. Although a familiar charging method, CFOs must place their trust entirely in the work-rate of their lawyer when instructing them in this way: when they do, they open the door to risk, rising costs and bill-shock. In other words, the exact opposite of what PE investors seek from the companies they sponsor.
At 360 Law Group, we work with a diverse collection of Private Equity portfolio companies allowing CFOs to achieve their ambitious financial targets by providing an array of pricing models, ranging from low hourly rates across multiple overseas jurisdictions (currently over 30 countries) to our award winning global subscription legal service model that enable CFOs to obtain price certainty wherever they are established or trade for a 12 month period, enabling legal spend to be accurately forecasted a year in advance.
We are a highly efficient and cost-effective distributed practice with over 200 lawyers worldwide. All of our Solicitors, Barristers and Overseas Attorneys have a minimum of five years’ post-qualifying experience in their area of expertise, however, in reality, most of our lawyers have 10+ years’ relevant experience, many having trained and worked as associates / partners in respected city law firms such as DLA Piper; Allen & Overy; Eversheds; Mayer Brown and Baker McKenzie. We do not use, in any jurisdiction, paralegals, trainees or juniors’ lawyers
By minimising contracting risk and providing certainty on costs, we help CFOs in PE-backed businesses to increase value by tightening up their contracts, reducing risks and improving their overall strategic positions. Together, we work towards a smooth exit that delivers sizeable profits. To find out more, get in touch with our team, download our subscription brochure or discover what our satisfied subscription clients have to say about our service.
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