The abrupt change in business conditions this Spring has accelerated many pressing issues facing those in the private equity community. Spectrum has had numerous discussions with private equity sponsors and other senior executives regarding current trends and important issues within their portfolios. One of the most pressing topics to emerge from our conversations with more than 100 PE investors and CEO’s that we’ve spoken to: the need to have the right Chief Financial Officer. Conversely, insufficient CFO leadership has many hidden costs and lost opportunities that are magnified in today’s climate. Here are timely reminders regarding the importance of having an accomplished CFO and 5 key roles they play in executing your investment thesis.
Protecting the Portfolio company’s financial position. This starts with sophisticated Cash Management policies. It includes owning the need for ongoing forecasting efforts to properly reflect the health of the business, modifying all budgeting/spending protocols accordingly, and delivering the necessary communication that’s required internally. Religiously staying on top of the financials helps each portfolio company focus their employees on the right priorities, and positions the investment favorably.
Reinforcing an Operational Excellence mindset. Professionalizing and optimizing performance has never been more important. Defining and modifying the right KPI’s, refining proper pricing policies, and preserving critical profit margins are three impactful ways that a proven CFO stands apart and pays for themselves each and every day. Experience matters. In the private equity world – where days and weeks truly matter – you need a CFO who runs at “private equity speed” with confidence and decisiveness. Strong CFO’s often lead the HR, IT, and Legal functions, and they critically influence most facets of the businesses. They know how to align employees and promote teamwork.
Demonstrating strategic value to the CEO and Board of Directors. The best partnerships involve a CFO who is deeply trusted and heavily relied upon by their CEO before key decisions are made. Their opinions are equally vital to their Board of Directors. Many PE investors value suggestions around growth, boosting employee productivity, and how to become more capital efficient. Strong CFO’s often prevent bad decisions and stir healthy debate advocating contrary positions. They also have conviction, and are willing – once consensus is reached – to take action.
Serving as your Brand Ambassador to the Financial Community. There are anxious Lenders to satisfy, Covenants to comply with, and Leverage ratios to maintain. The flexibility and cushions previously available have eroded and a seasoned and experienced financial executive is needed to carefully manage these relationships during this fragile time. The same is true for managing other key third party providers, such as the Audit and Tax firms.
Driving Results and Indispensable Leadership. The majority of our audience shared that having a great CFO is one role that cannot be sacrificed, especially during these market conditions. PE firms with underperforming or ill-equipped CFO’s in their family are upgrading. They know the return on this investment will pay off and help them sleep better at night knowing their business has the right financial steward.
Authored by Tom Shahnazarian & Kevin Hahn, Co-Founders of Spectrum Search Partners, a Denver, CO-based retained executive firm that specializes in private equity. If you wish to reach out to us, please write to: firstname.lastname@example.org and email@example.com