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Equity Options

Private equity's voracious appetite for financial talent is opening new doors for CFOs, if they can stomach the risks.
Jason Karaian, CFO Europe Magazine
September 20, 2007

It is often said that making changes at a large company is like turning around an ocean vessel: a long, slow process. Harry Morley knows this better than most, having spent several years in finance at P&O, a shipping company.

After six years at the London-listed firm, Morley grew weary of the pace of the job. "It was a difficult industry at the time, very capital intensive with poor returns," he notes. "I wanted to be at companies that were changing quickly."

He found a job as finance director of Whitecross Dental Care, a small firm recently bought by Apax, a private equity firm. "I knew nothing about health care, retail or how a private equity-backed business works," says Morley. But he impressed the owners with his experience of both capital raising and investor relations.

"Though it wasn't the most successful deal Apax had done, I made enough money from the exit to take time out from full-time employment," Morley says. "Then I looked for the next deal."

Ten years later, Morley has been through countless consulting and part-time assignments for several private equity houses, in addition to a hugely profitable deal that he guided from buyout to exit.

Since he entered the private equity world, many more finance professionals like him are stepping off of the listed-company career ladder. Private equity houses are fighting over CFO talent, both to place in portfolio companies acquired during the recent buyout boom and to groom for the time when credit conditions improve and deals start to flow again. While the risky, non-linear career path of the serial private equity CFO isn't for everyone, it's a more viable option for job-hunting finance executives than it once was.

The candidates London-based recruiter Sarah Hunt meets are "not interested in climbing corporate ladders" and don't wince at the prospect of, say, three different jobs in two years. To help these job-hoppers, she founded EquityFD, a private equity-focused headhunting firm for CFOs and controllers. These executives expect a bumpy ride, acknowledging that occasional blow-ups "are part of life's rich tapestry," she notes.

Food for Thought
"Private equity buys a company in order to execute a specific, challenging master plan," says Hanns Goeldel, a consultant at recruiter Egon Zehnder International in Hamburg. "There is no time for learning curves, so it's important for them to keep talent in the loop, people they know, trust and have demonstrated that they can execute [strategy] from the very beginning."

But where to begin? Goeldel seeks out the "entrepreneurial types" at listed companies who have sales, marketing or strategy experience in addition to financial acumen. He also places a premium on social skills. "After an exit," Goeldel observes, "executives often say that the intense interaction between the top team is what they liked most."

The defining deal of Morley's career owed a lot to teamwork. After his first private equity job at Whitecross, the CFO followed his boss — buyout veteran Finlay Scott — to a few short-term assignments at companies owned by Amadeus Capital. Then, when leisure group Whitbread put a group of UK restaurant chains up for sale, Scott convinced Morley and Gavin Williams, a former colleague and ex-managing director of the Bella Pasta restaurant chain (one of the brands on the block), to make a bid. Mid-market buyout firm ECI financed the £25m (€37m) purchase in 2002, installing Scott, Williams and Morley as CEO, COO and CFO, respectively.

When they won the bid, Morley and his partners were simply "three men and a briefcase," he recalls, without an office, staff or systems. Given private equity's traditional three-to-five year investment horizon, "the pressure to get things done was pretty intense," Morley says.

Amid the systems overhauls, divestments, rebranding and other tasks, the CFO's number-one priority always remained cash-flow forecasting. "To that extent, I probably got my hands dirtier than I would at a quoted company of similar size," he notes. Another unique aspect of the setup was the twice-weekly discussions Morley had with Richard Chapman, a non-executive director appointed to the board by ECI.

The executive trio was able to treble Ebitda at Tragus, the holding company, from £4m in 2002 to £13m in 2004. In 2005, the company was sold to LGV, another private equity firm, for nearly £100m. After that, Morley took time off from full-time work, keeping busy with interim assignments and non-executive appointments. He remains in touch with former Tragus colleagues, as well as ECI, TGV, Amadeus and a host of other private equity firms. He hopes to find another full-time position by the end of the year.

Paint by Numbers
Compared with Morley, Pierre Malmartel is a newcomer to life under private equity ownership. A 20-year veteran of French oil firm Total, Malmartel was head of a business unit at SigmaKalon, the group's paint division, when Bain Capital bought the business for €1 billion in 2003. After the buyout, Malmartel became CFO.

This gave him an opportunity to be far more involved in working capital management than before, with scope to "interfere in fields across the company," he says. Also new was the nature of the relationship with the company's owners. Shortly after the buyout, the company had a particularly bad month, Malmartel recalls. It was then that "Bain put instantaneous pressure on us," he says. "They wanted action, a full re-budgeting for the year and immediate action to cut costs." The drastic speed of decision-making surprised him at first, but served as a useful, early indication of what the new owners expected from management. The company looks set to return to listed-company hands soon, following a €2.2 bid from PPG, a US-based chemicals group.

Life under private equity ownership is clearly "a bit more dangerous," than what CFOs of public companies are used to, Malmartel says. "If things go wrong, they move quickly to take you out. You could lose your money and your job. The long days and nights of work require energy and patience." That said, "it is a fantastic experience — I would recommend it to everyone." What was particularly refreshing, Malmartel says, was that the incentives employed by private equity owners — aligning managers with shareholders — suppressed the usual office politics of a large company. With every executive focused on boosting the value of their equity stakes in the run-up to a potential exit, "politics disappeared overnight," he says.

Paper Chase
This aspect of the private equity experience appeals to Charles Jolley. He joined Burger King, the US-based fast food chain, as European finance chief a year ago, shortly after the company listed in New York. A private equity consortium bought the firm from drinks company Diageo for $1.5 billion in 2002, and retains a 59% stake in the company, making it a unique hybrid of a private equity and publicly quoted company, Jolley notes.

Burger King consists of two camps, "a group that has been around for many years and senior management hired when the company was purchased by private equity sponsors," the CFO explains. He then recounts an early meeting between the former head of Europe and a representative from the sponsor group. "True to the old days, [the Diageo old guard] worked like dogs to create a deck of 200 slides, the way Diageo liked to see things," he says. "At the beginning of the presentation one of the sponsors took the package and threw it up in the air, scattering the 200 pages around the room." He made the point that his interest was how the executive would make the division more profitable than it currently was. "That's how it works," Jolley says. That focus on results, he adds, left him with "a very favourable opinion" of private equity.

"Finance people run a lot of these firms," he says. "It's easy, as a finance person, to communicate with a fellow finance person about strategic and business issues. It gets boiled down to simple facts."

Now that Burger King is back on the stock exchange, a "natural level of bureaucracy" is creeping in to day-to-day management, Jolley says. Having spent his entire career at listed companies, including Hewlett-Packard and United Technologies, he now sees a big upside in the private equity model. The large private equity shareholding in Burger King helps to "keep the focus on profitability and return on investment, making sure it doesn't drift too far into bureaucracy."

There are other attractions, adds James Stewart, a partner at ECI, who's confident of winning over finance executives such as Jolley. The buyout industry isn't the black box it once was, with most experienced executives now well aware of its risks and rewards. Thus, "a CFO with specific sector skills is just as attractive to us as someone who has worked previously with private equity investors," says Stewart. His firm also looks increasingly to CFOs for help with due diligence on targets, as well as for ideas on potential transactions.

Placements at portfolio companies aren't always relentless cost-cutting exercises either. Within six months of ECI taking over Aerial Facilities, a UK-based wireless network manufacturer, the company acquired a sizeable Swedish rival, showing that "an appreciation for the M&A process and ability to extract value from bolt-on acquisitions" can also be important attributes for CFOs at private equity-backed companies, Stewart believes. As the skills required for private equity positions drift closer to the traditional responsibilities of finance professionals, more listed-company CFOs may decide to jump ship.