The challenges faced by the private equity CFO

I recently came across an article from McKinsey on the challenges faced by the private equity CFO. It distilled and magnified so many of the challenges faced by today’s chief finance officer that I wanted to share it with you.

McKinsey have declared that private equity portfolio companies are the crucible of the modern CFO – which makes holding this role the equivalent of jumping into the fiery furnace to emerge transformed and with red hot skills. It sounds uncomfortable but for those who can hack it – invaluable!

Leading such a company may involve helping an ailing company reach its full potential – but post pandemic it also means getting onboard with the sectors that have emerged as winners – high tech springs to mind, along with industries as diverse as life sciences and veterinary care.

The PE takeover means a sharp focus on growth, which requires the CFO to identify opportunities to both control costs and improve operations. It is a huge opportunity for the ambitious CFO to show off their skills, but comes with sharp scrutiny. As the McKinsey authors state;

“Borrowed capital means the risks are larger, the time to show results is shorter, and the scrutiny from investors is more intense.”

Reporting can also be a challenge. Many PE firms want to be involved in the financial end of things, requiring frequent updates from the private equity CFO.

To transform performance there will need to be new processes yielding quick results. It is certainly not a job for the faint hearted.

The private equity CFO – 4 priorities for change

The McKinsey authors have identified four priorities to help CFOs achieve success. They are;

  1. Get up to speed quickly on the economics
  2. Identify talent gaps
  3. Establish a reliable fact base for making critical decisions
  4. Actively lead the transformation charge

Economic outlook

The private equity CFO will need insight into the gritty details of what creates value and costs at the portfolio company – one CFO McKinsey spoke to estimated that developing this insight occupied as much as half of his time in his first six to 12 months. In many cases it transpires over and over again that disparate IT systems and siloed business units are limiting visibility and access to critical data.

In some cases data was simply not available because the systems were too antiquated, making it hard to see the real picture e.g. which lines of business were the most profitable

Finding the right people

McKinsey says;

“The existing management infrastructure can be in flux at such a time, even as investors are demanding results.”

So it’s time to encourage talented and engaged employees – looking out for skills you might need as well as people who are willing to drive change.

The report quotes one CFO at a midsize PE-owned company who empowered his team with the skills to provide meaningful reports. He went from being handed sets of figures to being given reports that meant something.

Owning the data

A reliable fact base is the key to uncovering new opportunities for value creation and McKinsey are surprised by how few PE-owned companies have good data readily available. But when it comes to changing that they see time as an issue.

“… the PE time horizon means that a multiyear rollout of a new enterprise-resource-planning system (ERP) will not be feasible. CFOs thus need to understand where and how to use lower-cost digital technologies to maximize the benefits in months or even weeks rather than years.”

This means identifying ERP style digital solutions that can be rolled out fast so that the insights can be unlocked as soon as possible. See conclusion for more info on how this can be achieved.

Transformation – lead the change

“The final priority for the new CFO in a PE-owned company is to keep the overall transformation on track. That includes defining key performance indicators and monitoring metrics in ways that are robust but not overwhelming.”

And this means having the tools at your disposal to do that – only then can the private equity CFO become the strong right arm of the CEO (and the PE fund) on strategic questions as well as on financial results and decisions.

Conclusion

In conclusion, a targeted cloud based IT upgrade is vital to take you from multiple siloed IT systems to a joined up transparent business which yields its insights freely.  A cloud-based system like SAP Business ByDesign or its speedy little brother Express Financials will give you the cross company data visibility, business intelligence and useable analytics within weeks. It may have the SAP name attached to it but it is not the huge ERP project that McKinsey has identified as too lengthy. A light ERP or fast financials system which comes pre-configured and “out of the box” is exactly what any private equity owned company needs.

Having addressed the points identified above, the modern private equity CFO can improve their chances of succeeding in the crucible of finance – emerging fully formed and triumphant, so that when it comes to the next role you can take your pick.

In Cloud Solutions have been trusted technology partners to growing companies for nearly a decade. Now part of Sapphire Systems we offer high quality advice and superior technology implementation. Please get in touch to discuss your digital and automation journey.

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