Stuart Kerr, CFO of Incremental Group, discusses the differences of a Private Equity (PE) backed business.

With a typical funding structure resulting in a leveraged balance sheet, life as a Private Equity (PE) backed business carries a relentless focus on cash returns to ensure investor debt is serviced.

Understanding working capital pressures, liquidity and free cash flow is therefore a priority focus that needs to extend all the way up to Board level; it’s not just the domain of the finance team or the credit control department.  Where banking covenants are involved, this immersion in cash management is taken to a whole new level of importance; tripping a banking covenant inevitably signals the end for the CFO.

Of equal importance to cash returns is profit generation; reported EBITDA needs to be an accurate, consistent and robust metric.  Most PE deals have some form of EBITDA multiple embedded in their valuation so it’s imperative that this metric is accurately reported and stands up to scrutiny on an exit process.  In addition, the importance of quarter-on-quarter (and often month-on-month) EBITDA growth over the period of investment can also bring unique challenges to a PE backed business.  With a typical three to five year investment horizon, it is not desirable for PE backed businesses to start making sizeable investments in the latter stages of the journey as this diminishes the ability to convert such investments into suitable EBITDA returns in the appropriate timescales.

Stakeholder relationships also require a very different approach in a PE backed business.  Within family-owned or SME corporates, reporting and interaction with owners and other stakeholders can at times be irregular and unstructured, while at the opposite end of the spectrum, listed companies have formal and well prescribed engagement with their shareholders on a regimented quarterly basis.  PE is different.  Continual dialogue and interaction with investors is an absolute must in a PE backed environment.  Satisfying the thirst of investors for huge volumes of data and significant granularity at any point in the month is expected of an PE management team.  Being able to adapt to this very different environment brings an intensity and pressure not always experienced before by those not familiar to life in a PE business.


 CFO to CFO: Ensuring your Private Equity backed business has the right platform for growth

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About the author

Stuart Kerr CA is the co-founder and CFO of Incremental Group and is responsible for the overall financial performance of the business and M&A.  Before co-founding Incremental Group, Stuart was Finance Director at Amor Group, a PE backed business, where he led the finance organisation through a period where it doubled its revenues to £60m over 4 years and successfully managed the sale of the business to Lockheed Martin.  He is a Chartered Accountant and spent 12 years with PwC focused on M&A.