Insight

The Effective Private Equity CFO… unlocking the DNA code

Lynn Skillen knows what it takes to be an effective CFO with a Private Equity-owned portfolio company. Skillen has been an accounting and finance professional for 25 years and served successfully as CFO at three companies (two of which were Private Equity owned.) For the last 14 years he has been a Managing Director –Operations at Sun Capital Partners, Inc. During his tenure there, he has worked closely with the CFOs and leadership teams of 40 of Sun Capital’s affiliated portfolio companies and helped select, recruit, and on-board more than 15 new CFOs.

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Recently, Vardis partner Dick Krant caught up with Skillen in Manhattan for a wide-ranging discussion about the role of the CFO in a Private Equity-owned business and the characteristics that have greatest correlation with success.

 

Vardis: What are the biggest differences in the CFO role at a Public company and a Private Equity portfolio company?

Skillen: The most obvious difference is the key metric.  While Public company CFOs focus on EPS, the private Equity CFO is focused on EBITDA and free cash flow.  The Public company CFO and team spend a considerable portion of their time on external reporting while the Private Equity CFO can focus a far greater proportion of energy on business performance and improvement.

The Private Equity CFO will often have fewer staff resources upon which to draw.  He/she has to be able to lead from the front and do hands-on work.  Fact-based decision making has to be done with generally fewer resources.  In the Private Equity world “rolling up your sleeves” is a reality!

Vardis: How often have you made a change at the CFO position after acquiring a portfolio company?

Skillen: It has happened in a minority of the investments I have been involved with but, as with any C-level position and change in ownership, there is some turnover. Some CFOs leave after a sale, and a change in CEO can lead to transition at the CFO position.  In other cases the rigor and requirements of Private Equity ownership will necessitate a change.

We have learned to ask ourselves “will this CFO be here when we sell the business?”  If no, we will make the change sooner rather than later.

(Note: a recent Vardis Partners survey indicated that investors change CFO 75% of the time after acquiring a new portfolio company.)

Vardis:  What set of prior experience do you seek when selecting a new CFO?

Skillen:  We look for 15-20 years of accounting and finance background with at least 5 years in a CFO (or comparable experience) role.  Ideally the individual will have a strong accounting foundation and we prefer a CPA whenever possible.  We also look for extensive FP&A experience and skill set.  Whenever possible we seek prior experience with Private Equity-owned businesses.  Finally, we want any new CFO to “hit the ground running” so we look for exposure to the company’s industry and/or its value creation strategy.

(Note: a recent Vardis Partners survey indicated the top criteria for CFO selection is prior Private Equity experience followed by specific industry expertise.)

Vardis: Which technical skills have the highest correlation with success as a Private Equity CFO?

Skillen:  Financial modeling and spreadsheet skills, well developed over their career.  Problem solving skills: fact based, clear logical thought, and fast decision making.  Effective CFOs communicate in a quick, clear and effective style with the ability to explain financial matters and performance indicators at whatever level is appropriate for the listener.  Our type of CFO could be in a cost reduction program meeting in the morning, a customer conference over lunch, a product development review in the afternoon, and on an investor call in the evening.  He/she needs to able to communicate effectively and efficiently with a wide range of constituencies.

Vardis: What personal and interpersonal attributes have the highest correlation with success?

Skillen:  We have learned over time that a strong work ethic, maturity, honesty and integrity are the characteristics needed to succeed.  An effective CFO has to be able to earn the trust and respect of the other functional leaders and the broader organization.

Vardis: What frequency and depth of communication do you (as the investor) want to have with a portfolio company CFO?

Skillen: In the initial months of a new investment or new CFO’s tenure we should be speaking daily.  Further on, we should have a weekly scheduled discussion and monthly detailed financial review. 

Vardis: What is the ideal working relationship between the portfolio company CEO and CFO?

Skillen:  They need to be very well aligned, open, and communicating often.  They must be supportive of each other in the organization, building confidence in the value creation plan and broader leadership team.  Their mutual trust will build credibility and confidence within the business as well as with lenders and investors.

That said, we fully expect our CFO’s to “hold their ground” in discussion of strategy and tactics with the CEO and other functional leaders.  The CFO has to have the maturity and judgment to handle those discussions productively.

Vardis: What is the ideal working relationship between the CFO and the other key operating functions?

Skillen: First of all, we expect the CFO to be able to teach the concept and mathematics of the value creation plan (EBITDA X Multiple – Debt) to the broader organization and drive that down to specific operational metrics and decision making.  The CFO needs to coach the organization to “speak the language of numbers, not just words” … to quantify observations and decision criteria.

We also want to see the CFO and his/her staff integrated with the operational teams on all key initiatives and activities including product/service development, major capital expenditures, and key pricing decisions.  “Get in early, be part of the team, help make better decisions.”

Vardis: What role do you expect a portfolio company CFO to play in dealing with lenders under normal circumstances?

Skillen:  We primarily look to the CFO to provide timely, accurate and high quality reporting, and thorough updates to lenders on key aspects of business performance and collateral.

Vardis: What about in troubled circumstances?

Skillen:  In troubled circumstances communication with lenders increases in frequency and intensity, but our expectation is the same.  Clear reporting and communication giving lenders up to date perspective on the business performance and near term outlook.

Vardis: What role do you expect the CFO to play in a re-financing?

Skillen:  Support the Sun Capital transaction team in financial modeling and forecasting that go with the re-finance process.  We expect the CFO with other senior managers to make presentations to prospective lenders as required.  We also expect the CFO to work with Sun Capital and outside counsel to move quickly through documentation of the deal. 

Vardis:  What role does the CFO take on at time of exit?

Skillen:  The CFO (and FP&A team) will take the internal lead preparing the CIM and management presentations.  The CFO must “know the numbers cold.”  Along with other members of the senior management team, the CFO will participate in all management presentations providing high quality insight into the business and its longer term opportunities and plans.

Vardis:  What functional areas beyond Finance (IT, Risk Management, Legal, HR, etc.) do you expect a typical CFO to oversee?

Skillen:  Let me first say that getting the accounting and finance house in order and the team functioning at a very high level is “Job 1.”  Only when that is in place should the CFO look to take on additional responsibility. Any or all of the functions you mentioned can fit into the CFO’s portfolio depending on expertise and available bandwidth. 

We expect all of our businesses to have a robust PMO (Project Management Office) structure in place to provide leadership and oversight for key strategic initiatives.  The CFO’s team is in the right vantage point to make that happen.  Finally and regardless of reporting relationships, we expect the CFO to “lean in” to the business and help all areas of the company improve their decision making, speed of action, and critical processes.

(Note: a recent Vardis Partners indicated that 73% of Private Equity CFOs have responsibility for functions beyond accounting and Finance.  Most common are Legal and Information Technology.)

Vardis:  What advice and counsel would you give to a first time Private Equity CFO?

Skillen:  “Over communicate and never surprise your investors!”

The best way to build credibility, protect the company, and protect your job is to make sure the Accounting and Finance house is in order and you have clear, timely, and accurate reporting.  Pay attention to the Balance Sheet as well as the Income Statement.  Know what is behind the numbers.

Get your team in place and “trained up” as quickly as possible.  You cannot have too many FP&A resources!

Get out of your shoes and into your investor’s shoes from time to time to think about the business and the investment from their perspective.

 

 

 

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