Vice President at ON Partners, Joe Olson, examines the strategic imperatives of finding the right CFO by organizational type in this ongoing blog series. The first topic in this blog series examines CFOs in Private Equity.
At ON Partners, we deal with a wide variety of CFO profiles across public, private and non-profit organizations. It can be very easy to make assumptions about what each scenario will need; but, as you can imagine, every organization is different. As a result, it is important to create a strategy that balances market context with the best fit for each situation.
In this vein, we are starting a series that looks at different organizational types and some of the common themes that we see.
BLOG SERIES #1: CFOs in Private Equity
While there are many more differentiators within PE models, I think the most approachable way to address the topic is to split PE into three main categories:
- Mega-Shops: This typically is represented by massive tier 1 PE organizations (KKR, Silverlake, Warburg, TPG, etc) and the type of deals that make lawyers and bankers pick out new beach houses.
- Midmarket: This is when you will see roll ups of field service (HVAC, Pest Control, Home Services, etc) or manufacturing environments. Within software, you may have a vertical integration play or merger of equals in order to take on a large incumbent enterprise software organization like Oracle, SAP, Salesforce, etc.
- Distressed/Turnaround Specialists: At times, this is an extension of a bank that has acquired under-performing assets and feels that with the right operational discipline and capital infusion, they can extract a tremendous amount of value.
For a mega-shop private equity CFO search, we are typically looking for a mature CFO who has a tremendous amount of operational experience working in highly complex (and potentially global) environments. We need a financial leader who can manage a powerful Board of Directors (with billions of dollars at stake) and the combined organizations (especially when we see a merger of equals). They must be able to balance a horizon-based investment strategy with strong tactical discipline. For example, if a liquidity event is 18 months out, you will have a very different systems investment strategy than a 48+ month deal.
This CFO needs to come armed with a playbook and they will have experienced a significant M&A transaction previously – either as a CFO or a direct report. In this environment, it is not uncommon to see someone who was more Corporate Development or FP&A oriented (versus a former Controller/CAO); but this is very much tied into the rest of the leadership team. If the CEO and management team have solid deal experience, you may look for the CFO to be the one who takes care of all G&A (HR, IT, Legal, Real Estate, Finance/Accounting, etc) and the Commercial side may drive overall strategy. In companies where the rest of the team is more Engineering/Technology oriented, you may have the CFO carry a bit more commercial weight and we would bring on a strong CAO/Controller to supplement those efforts.
In software/technology, this is still a fairly similar profile; but there may be additional expectations on the Partnership/Business Development side of the house. (Especially in SaaS businesses selling to large enterprises).
For a mid-market deal, it is critical for the CFO to be able to balance both short and long-term strategy. In these environments, the recent trend was to focus on heavy investment banking/FP&A-centric executives; but that is starting to transition to a stronger accounting base with the long-term ability to be strategic partner to the CEO as the organization scales.
We typically see situations where a Private Equity shop may acquire a number of field services organizations (high volume, localized businesses that are typically existing market leaders). The investment strategy is fairly straight forward –the company must streamline their G&A operations while maintaining field-level/commercial support. In theory, this allows them to create a centralized approach which can eliminate a tremendous amount of redundancy across their many locations. We often see that the biggest challenge in this type of investment scenario is that ERP/IT systems work is one of the biggest differentiators in quickly maximizing the investment. This also trickles down to the role of the CFO - if you can address the two biggest implementation risks with one hire (technology and finance), you have a much higher probability of success. Many of the more operational CFO/CAOs may have started their career in a big 4 shop; but they were focused on systems implementation work vs traditional Audit or Tax.
In software/technology environments, the CFO can have a broader remit that may include Customer Operations, HR, IT, Real Estate, etc. The expectation is that the CFO is primarily taking care of all internal operations while the CEO maintains a more strategic/product-centric approach. It is also not uncommon for a CFO to be very integrated into the Sales organization (especially around Sales Operations, Contracts, Commission/Compensation Structure, etc). At this size of organization, if the CFO is not providing analytical support to the rest of the business, they are severely limiting the ultimate success of the company.
In a Distressed situation, there is a wide variance of CFO profiles. For example, we often see executives who grew up in asset-heavy organizations (Automotive, Airlines, Transportation, Manufacturing, Retail). These leaders would have typically managed the challenging process of significant budgets cuts in a shrinking marketplace. It is also very common for these CFOs to come directly from banking/financial services. Generally, these are incredibly challenging roles and it is important that someone decouple historical context (brand/team connections, etc) from making the survival-centric decisions needed to protect the company. Unfortunately, it is also very easy to over-correct and erode any recoverable value during this process. This happens in all industries, but the stories in retail or consumer goods are typically more amplified (RadioShack, Toys R’ Us, Blockbuster, Schwinn, Kodak, etc) given the broader consumer awareness.
To be fair to turnaround stories, there are also phenomenal examples of success (Apple, General Motors, Starbucks, Marvel, Delta, etc) where banner institutions came together, made hard decisions and ultimately saved the company. In these particular examples, they focused on eliminating under-performing assets without sacrificing the innovation that got them there to begin with. Within Private Equity, the jury is still out on how sustainable this asset class will ultimately be (retail specific). Companies such as PetSmart, Dollar General, Staples, and Petco have been able to able to handle $b+ M&A events; but, other retailers (Toys R Us, Claire’s, Gymboree, Nine West, Rue21) have had significant challenges under that asset burden.
In software or technology, I generally look at turnaround CFOs are those that are very capital markets/deal heavy. They will need to understand operations; but their primary role is around either extending the organizational runway through a capital raise or selling the company to a strategic investor/asset sale and effectively exiting the business.
One of the most consistent themes across any Private Equity CFO search that we do is the need for prioritization of resources at a furious pace. You must be able to make decisions with incomplete information (this is typically where many CFOs fail). You must be able to understand the business, articulate the realities to the BOD/CEO; but, also be prepared to say yes to investment (unless there is a clear reason to say no). Some of the bias that we run into with CFOs coming from larger (public) organizations is that they struggle to make quick decisions + their automatic answer is no until they have received undeniable evidence that pushes to a yes. While this can be a necessary approach for $b+ public companies, the greatest advantage that a small company has in their agility.
As you can imagine, the market for PE-proven CFOs is quite active right now and it has been a very interesting exercise as we talk to CFOs from public/family-owned organizations that are looking to break into Private Equity-backed companies. In another post, I will discuss some of the additional challenges around the transition and how someone can prepare themselves to make the move.
About ON Partners
ON Partners propels an organization’s mission by building C-level and board leadership teams. The firm was founded in 2006 by like-minded executive search professionals desiring to establish a more client-centric alternative to the large multi-service global firms they were leaving behind. Growing quickly ever since, ON Partners has been named to the Inc. 500/5000 List six consecutive years and ranked as one of the Top 20 Retained Executive Search Firms in the U.S.