Private Equity CFOs Face Extra Complexities

Responsibilities for financial reporting, FP&A, systems implementation, capital needs, and more can be heavier than other private company CFOs expe...
David McCannNovember 25, 2019
Private Equity CFOs Face Extra Complexities

A successful CFO acts as the gatekeeper for all financial activities (and in many cases HR, administration, and/or other functions) and serves as a conduit for the presentation of operational performance to financial reports.

But, having served as finance chief for several sponsor-backed portfolio companies, I know there are significant nuances to these positions that may not apply to CFOs at private companies not backed by private equity.

Other private company CFOs deal with many and varied responsibilities. However, whether through direct responsibility or through the coordination of various consultants and other outside resources, the private equity finance chief must be able to maneuver through an even broader variety of financial and accounting disciplines and challenges.

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New, Comprehensive Financial Reporting

While all CFOs are responsible for financial reporting, it’s the required depth of reporting that often separates private equity CFOs from the rest. In addition, they need to create immediate improvements to processes and procedures that in many cases are completely new to the company.

For example, most of them are responsible for a quick monthly hard close. Many private companies not backed by PE do a soft monthly close and only perform a hard close on a quarterly or even yearly basis. As such, the procedures and personnel are not equipped for the rigors of a quick monthly hard close. The PE funds for which I was CFO required a 5-days-or-less close so the monthly package could be complete by the 7th to 10th business day.

A PE finance chief may also be responsible for the portfolio company’s first-ever audit. Many other private companies do not have audits and are managed for tax optimization; they are often structured with multiple entities that set up transfer pricing to maximize the tax outcome.

While a yearly audit in itself is a comprehensive undertaking, a first audit has additional complexities, such as opening balance sheets, purchase-price allocations, and physical inventories.

Deep FP&A Requirements

Private equity funds are notorious for their FP&A requirements. Comprehensive monthly reporting packages contain a level of detail most private companies do not address, including EBITDA bridges, cash flow projections, profit mapping, add-backs, pro forma reports, and restatements.

In addition to the monthly reporting, many PE funds require daily or weekly dashboards showing results of identified key performance indicators. The KPIs are both financial and operational in nature and all require the direct oversight of the CFO.

Systems Implementation or Upgrades

Many private companies do not have or fully utilize the latest sophisticated accounting systems. Their charts of accounts can be oversimplified, and many processes are manual.

One area that requires immediate upgrade after a PE acquisition is financial systems and software. Items that generally see initial upgrades include tracking and payment software, credit card programs, sales tax software, and billing.

HR and Administrative Resources

Changes in reporting and systems can result in the need to upgrade personnel as well. Often the existing finance team is underutilized and can be trained to handle some of the improvements, but teams still need to be upgraded to absorb the additional burdens.

Managing existing requirements, system improvements, and new staffing needs makes the job of a PE finance chief even more complicated.

Complicated Capital Structure

PE companies by their nature have complicated debt structures that are not features of a typical family owned business. Bank covenant reporting can add to the already burdensome quarterly or monthly packages.

It is also expected that the capital structure of a PE-backed company will change on a regular basis. The CFO must be able to manage these ever-changing bank relationships throughout the entire investment period.

Serving Two Masters

The CFO generally reports to the CEO of a company. But, because of the comprehensive reporting requirements and M&A activities of a PE fund, there is usually a direct line of communication between the CFO and the fund’s finance team.

That often strains the CFO’s attention and resources. The CFO must be able to manage through these parallel demands on their time. In this role, the finance chief is also a major strategic partner to the owners and senior management and must be able to support the strategic planning effort.

Managing Change and M&A

PE funds do not typically buy companies to maintain the status quo. Acquisitions, capital restructurings, personnel upgrades, ad-hoc reporting, use of outside consultants, and surge resources are just a few examples of the constant changes that occur in a PE-backed company.

The CFO of a PE-supported company also must be fluent in all phases of M&A activity. Add-on acquisitions are a major driver of growth and a daily part of the CFO’s life. He or she must be able to manage and/or coordinate all of the internal and external aspects of the acquisition process, including target generation, due diligence, modeling, structuring, and integration.

Private equity CFOs must be able to adapt to new environments very quickly. They need to gain the respect and trust of the existing personnel and at the same time execute responsibilities in a fast-changing, high-growth environment.

While the job of a conventional CFO could entail the need for deep expertise in an industry or specific functional areas, a finance chief operating at a portfolio company must understand the unique nature of the private equity space and the challenges it presents.

Steve Pinsky is a principal at UHY Advisors, NY Inc. He has more than 20 years of direct CFO/COO and consulting experience guiding companies in both the private and public sectors through critical transitions. He’s spent much of the past decade working in senior finance and operational roles for equity-sponsored portfolio companies as they worked through various stages of their investment lifecycles.