The CFO role in a private equity or venture capital backed business is to some extent, similar to any other CFO.
As with all CFOs, they are ultimately accountable for the financial health and growth of the business.
Some of the areas in which all CFOs will operate to achieve this include:
- The implementation of financial processes and systems.
- A forward-thinking approach.
- The ability to deal with emerging technology.
- Ensuring an integrated approach between all areas of the business including HR, legal and commercial.
There are, however, some priority attributes required of a private equity CFO which can have a domino effect on everything else.
Investors require significant growth, returning the planned profit on their investment within a given timescale which dictates that the private equity CFO has a unique combination of professional and personal characteristics necessary for a successful outcome.
A private equity CFO must be able to translate knowledge and experience into action despite external and internal pressures.
There are some attributes the private equity CFO must possess to make everything else work.
In this article, I look at six common challenges from within the venture capital/private equity sector and highlight the necessary attributes needed by a private equity CFO to ensure they are successful in the role.
#1: Investor and Portfolio Company Conflict
Private Equity CFO Attribute: Communication Excellence
For every private equity-driven business, there is the potential for unintentional conflicts within, or between, portfolio company departments or financial sponsors even if they are in principle focused on achieving the same aims.
The methodology discussed and agreed between all parties is one thing, but the necessity for absolute clarity as to how that methodology is progressing or needs flexibility is entirely another.
With an often complex array of financial strategies, forecasting and planning in operation at any one time, there is a need for a CFO to communicate ‘right first time’ to ensure the link between all the main parties remains a strong one.
This means not only tailoring the information to a diverse audience but ensuring that information is of the type that builds trust and inclusivity.
The CFO who demonstrates a high level of communication is the one who, from a financial perspective, will help keep the interdependent bodies of a portfolio company and financial sponsor informed, connected, satisfied and away from conflict.
#2: Frequency and Complexity of Private Equity Initiatives
Private Equity CFO Attribute: Appropriate Experience
Private equity CFO’s operate across a wide range of financial initiatives taking place in real-time within a fast-paced commercial environment.
They must have the necessary experience to hit the ground running.
CFO’s who have a track record of dealing with all aspects of finance such as FP&A at an organisational level from within other sectors may well be equipped to step into the private equity arena, but it is not a given.
A CFO who comes with a personal portfolio which includes a successful track record within an operational private equity backed company role is preferable and, for some, is often a must when satisfying the most demanding of private equity sponsors.
At the very least, one of the crucial questions is: has the CFO in question had experience leading a financial transformation in a company as complex as the project they will be undertaking?
If the answer to this is yes, there may well be a benefit to bringing in a CFO from another industry who can bring new ideas and approaches, but the balance is a fine one.
With internal rates of return driving, every aspect of a private equity backed business, if a CFO is held back by a lack of experience at the required level, the potential slowing of IRR will soon erode credibility as well as investor confidence.
#3: Culture Clashes
Private Equity CFO Attribute: Authentic Flexibility
Can a new private equity CFO fit immediately into, or quickly adapt to the culture which exists in the business environment in which they are to operate?
Financial competence at the required level is an essential consideration as we have seen, but the most effective private equity CFO’s are those who can quickly adapt to the culture.
Merely stating a desire or an ability to adapt to existing business culture is not enough.
In the modern world of PE/VC backed companies, being able to adapt authentically (the opposite to paying lip service) to existing cultures and go on to grow and develop their key components to be even more effective are stand-out attributes in a CFO-CEO driven partnership approach.
The complex world of venture capital and private equity finance means that rapid personal assimilation into the existing culture to start getting the job done right from the outset is a non-negotiable
#4: Continuing Volatility
Private Equity CFO Attribute: Consistent Resilience
The constant need for financial transformation at a speed which satisfies both portfolio company and financial sponsor calls for a CFO who possesses a high level of personal resilience.
The ability to continually meet and exceed the demands of the private equity backed company environment can only be achieved by a CFO who can operate in the financial performance zone consistently.
This means avoiding burn out halfway through, and it means avoiding just doing enough.
With private equity CFO’s needing to expend substantial energy across the whole life cycle of the project to counter internal and external barriers, a lack of resilience may well hold a CFO back from demonstrating the full range of capabilities you see on their CV.
#5: The Need for a Team Approach
Private Equity CFO Attribute: Team Leadership
It cannot be said that every private equity backed company has at its core evidence of a ‘one team’ high-performance culture.
Calculated risk-taking where the whole team works together to go above and beyond the stated exit strategy means that the senior leadership team, including the CFO, need to facilitate and support this approach.
A CFO with personal leadership qualities that are positive, influential and supportive is paramount.
Although a private equity CEO may be accountable for a one-team approach, the CFO can slow this process down as well as facilitate its creation.
A CFO who works as part of a team not just with the CEO and senior management team but also encourages the same approach across the whole operation is one who will maximise the capabilities of all.
#6: Ever-Present and Expanding Volatility
Private Equity CFO Attribute: Anticipation
With costs, political and economic global concerns, rising salaries and other issues seemingly continuing to spiral week by week, the need for a CFO to anticipate the impact of these on the current project is critical.
The ability to anticipate what’s next in an already competitive sector can be defining, not just in the realisation of outcomes but also in the context of the CFO’s career.
With indications that there is no shortage of capital continuing to be available, anticipating challenges to realise returns will continue to be essential.
Private equity CFOs who can not only anticipate the impact of current economic situations and interest rates on financial success but create strategies to mitigate their potential effects are those who are among the most successful.
While there are multiple competencies needed by a private equity CFO which mirror those required by CFOs in other organisations and are a ‘nice to have’, some are non-negotiable.
A CFO who possesses the following six attributes will quickly make an impact on a venture capital/private equity backed company.
1. Communication Excellence
2. Appropriate Experience
3. Authentic Flexibility
4. Consistent Resilience
5. Team Leadership
To succeed as a private equity CFO, it is not knowledge that is power, but the ability to put that knowledge into action on-time, every time.