The role of the private equity chief financial officer has become business-critical, but is always changing with the times. A new report from Acertitude looks at the transformative evolution that private equity CFOs are currently experiencing.
April 26, 2024 – Navigating a tapestry of challenges, private equity CFOs have undergone a transformative evolution, shifting from being financial overseers to becoming strategic pilots. Their role surpasses the scope of accounting and reporting monthly numbers; they now own and harness data, providing invaluable insights that improve fact-based decision making for the organization at large, according to a recent report from Acertitude’s Scott Carberry. “The emerging PE CFO is a vital linchpin, balancing the financial acumen, operational resilience, and strategic foresight poised to unlock new dimensions of success in an ever-changing landscape,” he said. “Adopting to these evolving circumstances, the responsibilities shouldered by PE CFOs have experienced a notable metamorphosis in contrast to previous years.”
“Today’s is an adept communicator and collaborator, transcending silos to engage operational leaders, investors, and portfolio company executives to navigate fluid market dynamics, conserve cash, and drive transformation,” Mr. Carberry said. “Most importantly, they enable the ability to drive better and faster decision making, aiding in the execution of the value creation plan.”
In the current landscape, there are heightened market challenges confronting PE CFOs compared to previous years, according to Mr. Carberry. He says that executives grapple not just with survival, but proactively rising from economic inflation to maintain the original investment thesis. “These times demand meticulous attention to minute details and a strategic pivot around new pain points – namely inflation, rising interest rates, and supply chain disruptions,” he said. “Each of these challenges bears its own set of sub-challenges leading to after-effects, and the key areas to focus on during these times include balancing cash management and revenue growth, evaluating headcount, benefits, procurement, and facilities, while also investing in automation.”
Mr. Carberry explains that amidst these dynamics, pace is still paramount. “Even in the face of impending challenges, the deal team continues to expect prompt execution within the business, tasking PE CFOs to augment their strategic maneuvering while managing rapid timelines,” he said.
Steering Through Economic Unpredictability
The increased price of cash adds new complexity to the PE CFO role, requiring the crafting of inflation-resistant financial models. Mr. Carberry explains that the aim is to safeguard investments against mounting price pressures and preserve their value. According to PwC, about 47 percent of PE CFOs say their top priority is building these predictive models and developing scenario analysis capabilities. They adopt a cautious approach during uncertain times while remaining open to seizing advantageous opportunities.
“The rise in interest rates has exerted tremendous stress on cash flow, which cascades across the entire organizational budget,” Mr. Carberry said. “The once-familiar terrain of budgeting and forecasting now encompasses sophisticated interest rate hedging strategies, aimed at safeguarding portfolio investments against potential volatility.”
Mr. Carberry notes that supply chain disruption, once regulated to operational concerns, now falls under the purview of PE CFOs. “Financial leaders are tasked with deciphering the intricate web of global supply chains while recalibrating investment strategies based on these insights,” he says. “As a result, PE CFOs gauge potential risks and opportunities stemming from uncertainties, reshape investment decisions and optimize portfolio performance to adapt.”
As a senior partner, Scott Carberry brings more than 20-years’ experience in executive search, management, and sales. He leverages considerable functional and industry expertise to execute quickly on key assignments and brings a track record, spanning several industry verticals and functional areas. Mr. Carberry has completed leadership assignments including president, COO, partner, practice leaders, service and business unit executives as well as executive sales and marketing roles. Scott specializes in professional services spanning consulting, outsourcing, IT services, digital transformation and enterprise software.
PE CFOs must prepare their organizations to navigate intricate risk scenarios, Mr. Carberry explains. “They must embrace a flexible, data-centric approach to scenario planning, allowing them to assess the ripple effects of market risks,” he said. “To promote business agility, they forge cross-functional collaborations across the enterprise, ensuring tighter alignment between deal partners, portfolio company leadership, and the board.”
Managing Growth and Conserving Cash
The changing debt-to-revenue ratio for PE firms has prompted CFOs to become both conservative and opportunistic. “Sustaining growth, increasing profitability, and reducing expenses pose a greater challenge in today’s higher interest rate environment,” Mr. Carberry said. “Firms need to cut back, but need to have profitability and growth, raising the need for working capital to ride out the slowdown. Achieving a favorable balance between driving growth and preserving cash is essential to ensure the generation of positive EBITDA.”
Mr. Carberry also notes that many financial leaders have embraced advanced scenario planning and modeling to inform strategic capital decisions. He says that this involves managing price increases while addressing long-term customer demand. While pursuing long-term growth goals remains feasible, the margin for error diminishes, underscoring the critical importance of more selective investment.
Related: As CFOs Gain in Stature, Succession Plans to Replace Them Falter
“From deal initiation to exit, PE CFOs face the pressure of meeting stringent targets and optimizing investor gains,” said Mr. Carberry. “This mission assumes even greater importance amid the current climate of high inflation, rising interest rates, and supply chain disruptions. Regardless of external forces, the aim remains steadfast – maximizing exit value. PE CFOs must collaborate closely with colleagues across the C-suite to recalibrate budgets and reassess pricing strategies. This proactive approach aims to ensure that growth remains achievable, with a renewed focus on prioritizing long-term growth initiatives.”
Accelerating Transformation
The process of accelerating transformation parallels the PE CFO’s endeavor to navigate economic complexities and fuel growth, Mr. Carberry explains. This dual pursuit requires leading the charge toward digitization, standardization, and automation. He says that by streamlining workflows, defining key performance indicators, and monitoring metrics, financial leaders harness strategies to inform strategic decision-making.
In recent years, Mr. Carberry explains that the volume of data within private equity firms has expanded exponentially, presenting both opportunities and challenges for financial executives. “With data scattered across various systems and platforms, consolidating this information has become a top priority for PE CFOs,” he said. As such, PE CFOs are investing in technologies and strategies aimed at integrating disparate data sources, standardizing processes, and harnessing analytics to gain actionable insights. By leveraging advanced analytic tools, executives can unlock valuable insights, optimize performance, and better drive strategic initiatives within their organizations.”
A Look at the High Demand for Top CFOs for Private Equity Firms
In times of volatility, financial stability becomes an understated hallmark of business success. Private equity firms have, appropriately, responded to the severe macroeconomic challenges of recent years with caution, making unprecedented pullbacks in investment and reaching record levels of dry powder, according to a new report from Slayton Search Partners’ Dan Dunn.
“Today’s firms are steadying their balance sheets and preparing for long-term growth by building quality over quantity—a process that will increasingly require proactive CFOs,” he said. “CFOs are key drivers of sustainable value creation for PE firms and their portfolio companies. As portfolio sizes remain limited and the need for exceptionally successful exits grows, the role of the chief financial officer will expand in the coming years. Subsequently, demand for experienced private equity CFOs is certain to rise.”
PE CFOs can monitor the impact of standardization across the finance function and the entire enterprise. Mr. Carberry says that achieving digital transformation necessitates organizational alignment, harnessing new technologies to amplify the efficacy of traditional financial tools. This infusion of technology fosters synergies, spurs growth, and enhances job functionality – when integrated properly.
“CFOs who lack effectiveness often exhibit a shallow understanding of the business and lack the commercial acumen necessary to extract impactful insights from data, which is essential for driving value creation strategies,” Mr. Carberry said. “In the dynamic realm of private equity, the transformative journey of the PE CFO epitomizes resilience and adaptability. Economic challenges have catalyzed a pivotal shift beyond the traditional role of financial steward, and PE CFOs now emerge as strategic navigators, armed with innovative strategies and data-driven insights.”
Today’s financial leader needs to see the forest for the trees, and perceive the larger panorama while mastering the minutiae, adept at viewing the overarching business landscape from multiple vantage points, Mr. Carberry concludes. “The success of a PE CFO lies in their seamless blend of financial acumen, scenario planning, and the knack for forging strong partnerships,” he says. “This commitment guides organizations through choppy waters toward sustained growth and triumph within the ever-evolving private equity landscape.”
Related: Financial Services is Booming, CFO Role Continues to Evolve
Contributed by Scott A. Scanlon, Editor-in-Chief; Dale M. Zupsansky, Executive Editor; Lily Fauver, Managing Editor – Hunt Scanlon Media
