Prominent Role of The CFO in a Company

The role of the CFO in a company (partially) owned by a private equity fund presents a unique set of challenges and opportunities. The CFO role is, in fact, a very crucial one for PEs, as it is the “guardian” of the cash flows and the critical reporting metrics (hence of the key value reference points) of a Company.

While being in charge of working side by side with the CEO on the vision and the mapping of the Business Plan, the CFO is the person that ensures that the company has the resources necessary to achieve it and that all the financial risks are currently addressed; this role makes it a key figure for financial investors such as PE that want to ensure that the company is safely run to achieve their target returns.

Managing the financial aspects of the business can be a complex task as private equity investors sometimes have different goals and objectives than traditional shareholders. This complexity gets exacerbated when PEs and more traditional shareholders are present in the company’s capital.

Let’s start by summarizing the key peculiarities/challenges/ opportunities of working in a company with such an ownership structure:

1. Balancing the interests of the different shareholders: the different shareholders often have different objectives, KPIs and strategies for the company that needs to be balanced and integrated for the best overall outcome.

2. Short term gains over Long-term value creation: sometimes (but not always) private equity firms tend to prioritize short-term gains over long-term value creation, which carries of course risks for the long-term success of a business, if not properly managed.

3. Understanding the different types of private equity partners: the nature of the private equity fund has a relevant impact on the daily work of CFOs and CEOs. Unless the PE is passive, It is critical to be supported by funds with the correct expertise in the specific industry in which the company operates and/or have the right network that can provide valuable insights and resources to help the company succeed.

4. Managing debt and leverage: Private equity firms use debt to finance their investments to increase returns. This may drive very high levels of leverage of the company. The CFO must ensure that the debt levels are sustainable and that the company's financial position is secure.

5. Exit strategy: Private equities have a set timeline for exiting their investments and realizing their returns. This can put pressure on the management and the implementation of its strategy needs to be considered and properly planned to match the long-term goals of all stakeholders.

6. Relationship with Banks: A private equity fund mostly positively impacts the company's relationship with banks as it can make a company more attractive and secure; however sometimes, it can make it more difficult for banks to assess the company's credit rating and overall risk.

"The CFO role is, in fact, a very crucial one for PEs, as it is the “guardian” of the cash flows and the critical reporting metrics (hence of the key value reference points) of a Company”

Here are the key strategies/actions to effectively drive and lead a PE-owned company:

A. Communication is Key: The first and most important strategy is establishing clear and structured communication channels between the company's management team and the full board to keep informed all shareholders about the company's financial performance, growth plans, and significant developments. This can help build trust and transparency, allowing management to work with autonomy and balance the parties' objectives.

B. Set aligned Goals and Objectives: CFOs must work with the management team to set clear goals and objectives that align with the private equity firm's investment strategy and the rest of the shareholders – defining clear KPIs and objectives help to keep all stakeholders focused on a common goal and drive collaboration vs. “opinion driven” conflicts.

C. Drive Financial Discipline: Private equity investors are typically focused on generating strong returns within a specific time frame. As a CFO, it is crucial to maintain financial discipline and ensure that the company operates within its means, while enabling investments. One of the key mistakes often seen is an excessive focus on cost cutting vs. creating a framework that drives high return investments – contrary to some of the more traditional expectations from CFOs, it is vital to balance efficiencies with investments to drive growth.

D. Leverage the Expertise of the Private Equity Firm: working closely with the private equity firm to identify areas where they can add value is a key success criteria, including providing strategic guidance, introducing the company to potential customers or partners, or offering operational expertise.

E. Create a balanced board of directors: One area of influence that is important to leverage is the composition of the board of directors – a balanced Board that includes representatives from both the private equity firm and other shareholders can help to ensure that both groups have a voice in the decision-making process and can provide valuable input and perspective.

F. Identify conflicts of interest: different objectives and priorities between the private equity firm and other shareholders inevitably generate conflicts of interest. As the CFO, it is important to identify and address those proactively by creating clear guidelines for decision-making and eventually establishing committees (with internal and external advisors).

G. Prepare the company for an exit: CFOs must know clearly what is needed for the company to be ready for a successful exit and plan for the activities required - this may involve strategies to enhance company valuation, identify potential buyers, check IPO opportunities and have a ready framework for due diligence.

CONCLUSION

Managing a company partially owned by a private equity firm can be challenging. It requires a unique set of skills and strategies for CFOs and a proactive and thoughtful approach to address situations that may not be present in the traditional corporate governance models. Conversely, a PE represents a unique opportunity regarding support, liquidity, expertise, network and constructive challenge.

While there is no one-size-fits-all approach, the ultimate responsibility of the CFO is to remain focused on long-term value creation while addressing all shareholders' interests.

Balancing short-term and long-term objectives, managing conflicts of interest, handling debt and leverage, and getting the company ready for an exit are some of the most difficult situations that CFOs may face; understanding these challenges and implementing strategies to address them while maintaining open communication and transparency, is key for the long term success of any company.