Stuart Kerr, CFO of Incremental Group, analyses the challenges of a CFO in a Private Equity (PE) backed business. 

The role of the CFO in a Private Equity (PE) backed business has some fundamental differences to the role of a corporate CFO.  First and foremost is the need for a relentless focus on the exit.  All decisions and actions of a CFO should be taken with an eye on the value creation opportunity and potential impact on exit multiple.  The nature of PE investment means that it is almost impossible to predict the timing of an exit so the key to success is being prepared for exit from the outset.  The intensity and pace of the journey are also very different for a PE backed CFO.

These differences can create a challenging and often stressful environment in which to operate; not all CFOs relish this shift and many don’t succeed but for those that understand and fulfil the expectations of their PE investor, the rewards of the journey can be significant and not just in personal wealth creation terms.

PE backed CFOs now have a broader remit than ever before, with many also having a role in driving revenue growth, delivering transformational projects, implementing new systems and driving operational improvements.  However, of fundamental importance to investors is the CFO’s responsibility for robust financial stewardship, particularly in a leveraged scenario.  Getting this core requirement wrong will render all successes on the non-core aspects of the role meaningless.  The core challenges faced by a private equity backed CFO can be broken down into several key elements.

Accurate and timely reporting of financial performance

Probably the most critical aspect of the CFO role is the responsibility to provide accurate and timely monthly management information – failing in this fundamental requirement is often unforgiveable in the eyes of the investors and significantly impacts investor confidence in the CFO.  Closing the month end in short order but with a robustness and accuracy that provides insightful and consistent analysis of performance is therefore the number one priority for the CFO.

In addition to the obvious impact on monthly management and stewardship, the preparation of robust, accurate and consistent financial performance reporting through the period of ownership is a key deliverable that assists exit readiness and alleviates some of the pressures of future due diligence.

Ability to produce granular and actionable data

The nature of PE investment and the need to return value in the short to medium term results in many PE investors having a significant appetite for large volumes of data to allow them to assess performance of their investment and pursue change, where necessary.  Such thirst for detailed insight adds pressure upon the CFO to drill down to a level of granularity that can often come as a surprise to CFOs that are unfamiliar with PE.

Being able to proactively and reactively drive out granular analysis of all aspects of financial performance provides insightful and actionable data to the management team and the investors to facilitate informed decisions that can positively impact EBITDA.  Furthermore, regular reporting of granular insights such as the impact of organic versus acquired growth, profitability of individual jobs, impact of key strategic decisions and detailed working capital trends, provides rich data for future buyers and can help expedite future sale and due diligence processes.

Forecasting and anticipation of future performance

Understanding how the business is performing against the investment plan is only half the story for the PE investor.  Getting a robust view of the forecast performance against the plan is of equal importance for investors and funders.  This ensures that any anticipated variances are acted upon early to either rectify or initiate appropriate counter measures.  An absolute taboo for a CFO in a PE backed business is surprising investors with an unexpected financial result be it monthly, quarterly or for the full year.  Being able to predict financial results with a high degree of certainty is a key attribute that not only satisfies stakeholders on a regular basis but also helps management and investors plan for exit readiness.

Control environment

For many small to mid-sized PE backed businesses, the existing processes and control environment are not suitable for ensuring the absolute integrity of the reported financial performance.  As such, a key priority for the CFO in delivering on the financial stewardship requirement is often the design and implementation of a suitable system of internal controls and processes.  Achieving this early in the journey is a must to ensure that financial discipline is embedded throughout the business for as much of the hold period as possible.  Being able to demonstrate the robustness of processes and integrity of data through an exit process is a key contributor to a successful exit.

Managing cash and debt

An ever-present element in most PE structures is debt.  Whether in the form of loan notes, convertible securities or bank debt.  Servicing and reducing such debt as well as compliance with the related financial covenants is another critical aspect of the financial stewardship expectation that is firmly placed upon the shoulders of PE backed CFOs.  Having an almost daily understanding of liquidity in a leveraged situation and being able to appropriately manage cashflow, working capital and debt servicing can be extremely onerous for a CFO, particularly if the underlying systems are not supportive of real time insight and management of this critical area.  However, a slip up on liquidity is unforgivable in the eyes of a PE investor.

Keeping a tight rein on costs

Whilst a key requisite for any CFO, maintaining control of the company’s cost base is an amplified requirement for a PE backed CFO and often involves keeping the spending desires of the CEO in check.   With continuous pressure on delivering quarter on quarter EBITDA growth to benefit the future valuation of the business, any investment in the cost base of a PE backed business must be fully justifiable from a return on investment perspective, including generating a suitable return within the timescales of hold period.


Want to learn more about the CFO challenges within a PE backed business?

Access our free whitepaper where our CFO Stuart Kerr discusses in depth the challenges and demands on the CFO, and concludes with how to establish a platform for growth and overcome these challenges.

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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.