Risk Management

“You Take Risks and You Own Them.”

CFOs at private equity–backed companies love the challenge, and the payoff. Interviews with New Breed CFO Rick Wimmer, Culligan CFO Maria Henry, Ee...
David McCannJuly 15, 2011

For the right kind of finance executive, the lure of a CFO post at a private-equity portfolio company is easy to see: a potential equity stake that could mushroom in value upon a successful exit, an opportunity to make a big impact, and, for some, the chance to escape the glaring spotlight at a public company.

But what is the job actually like? The short answer, based on CFO’s conversations with finance chiefs currently in such roles: exciting and exhausting.

Switching CFOs frequently accompanies the maturing of private equity–owned companies, notes Peter McLean, chairman of the financial-officers practice at recruiter Korn/Ferry. “When PE firms buy a business, they typically bring in a CFO with strong operational finance experience. At that point, it’s all about managing costs and cash flow. But there are often changes as portfolio companies get ready to go public or be sold.”

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We asked four finance chiefs to describe their experiences in the dizzying world of private equity, and offer advice for those weighing whether to leap into the fray.

CFO: Rick Wimmer
Company: New Breed, a $700 million supply-chain logistics firm
Start date: November 2010
PE owner: Warburg Pincus

I had worked at Ernst & Young for 34 years. I was 56 years old, and in public accounting you’re going to be out at 58 or 60. So I started looking around. There were several offers, including one from a Fortune 100 public company. But I wanted the fast pace of private equity and thought it would work out better monetarily, anyway.

It’s my first CFO job, but I’d been half a seat away from the CFO during at least a dozen client IPOs and when working on complex financings and dealing with sovereign wealth funds. I worked with many private-equity companies.

U.S. private-equity investment, 2001-2010After so many years with one employer, it’s a bit of a culture shock being somewhere else, but in many respects it’s not that different. When you deal with private-equity firms and the entrepreneurs behind them, you usually have to be able to thrive in chaos. You have to look at multiple paths simultaneously, and that’s not much different from having multiple clients and going from one to the next quickly.

One difference is that in a Big Four firm, you’re working with the top 2% of college graduates. They are the cream of the crop and highly motivated. Going to a private company, you may have many good finance people who are career individuals and doing great work in accounts payable and payroll, for example. But you have to think about how to motivate those people to create a high-performance team. That was a new challenge for me.

I’m trying to change the mentality so that my team understands that we are overhead, that the folks in the field — managers and sales — are the ones creating the revenue, and we need to think about how to help them. That means, for example, monthly trend analysis of direct operating costs as well as the indirect costs of such items as supplies, security, janitorial, among others. It’s almost like I’m trying to create a professional-services firm inside the finance group.

In private equity, you always have to factor in the owners’ time horizon. If you’re looking at an acquisition, for example, it has to create value sooner rather than later. If [a deal won’t] happen for three years, it may be beyond the horizon.

I think there’s more pressure on large public-company CFOs, who have to have accurate forecasts and have great public accountability and liability. But I think small-cap public companies are less pressured than private equity–backed ones, which are pursuing multiple options and strategies.

And if you don’t perform, you can get blackballed. It’s a pretty close group, and they share lists and names. I had other job offers that would have been less risky, but I’m an adrenaline junkie. I love the deal. I’ll tell you this: people talk about the hours in public accounting, and I worked a ton of them, particularly as a managing partner. But it’s not as many hours as I’m putting in here. It’s not unusual to have a conference call at 10:00 p.m. Not everyone can do that.

CFO: Maria Henry
Company: Culligan, a 4,000-employee water-treatment company
Start date: October 2005
PE owner: Clayton, Dubilier & Rice

I think of myself as having grown up at General Electric, where I spent my first eight years in business. GE gives you training beyond finance, a broad business perspective, and a sharp discipline in operating finance, financial planning and analysis, and metrics. That is a huge advantage, and a key component of how I got where I am.

Next came a series of jobs at private companies, including two in private equity, where I was a step away from the CFO. Then I was CFO of a public company, Vastera, for more than two years.

But there’s a good fit for me in private equity. At the time I landed my first job in the field, I had established a track record at GE of driving results, getting things done. And private-equity firms look for CFOs who can provide leadership for significant change.

In coming to Culligan, another advantage was that I had experience in smaller-company environments that didn’t have all the structure and process of a large company. You can learn the fundamentals and then apply them to a different type of environment. For a job like mine, private equity is not a training ground. You have to know what you’re doing when you come in, because there is a laser focus on delivering results. The first private-equity partner [I worked with] said to me, “It’s all chatter if I can’t see it in the financial statements.”

My job is very exciting. In the last year and a half we’ve gone through two business-model transformations. One was from being an equipment seller to a recurring-revenue-based model. Now we’re transitioning from having company-owned stores to a purely franchised model.

In a PE-backed company, you have a high degree of personal ownership for the decisions you make, and for putting up creative solutions, backed by analytics, that get buy-in from the owners. You take risks and you own them. That is very motivating.

CFO: David Brault
Company: Eemax, a $20 million manufacturer of water heaters
Start date: February 2009
PE owner: The Riverside Co.

Riverside is focused on smaller deals, so the CFO has to wear lots of hats. The biggest challenge I had going from a public company to a small private one, back in 2001, was the level of detail I had to get into. It was a priority for Eemax to evaluate whether I could get my hands dirty and be patient dealing with details, while also being strong enough to think strategically.

There was no technical support manager, so I stepped into that role. I’ve also used technology to make the order-to-cash process more efficient and helped the operations people develop a more efficient shipping process. And I bought a cloud-based package, NetSuite, that lets the manufacturers’ reps we sell to see their commissions online, enter sales orders, request credit memos, request technical support, and more (see “Now You See [Some of] It“).

I cut my teeth in the private-company world for seven years with a furniture company called Interlude Home, which was not private equity–sponsored. There are huge differences not only between public and private firms, but also between private and private equity–backed firms.

A lot of small private manufacturers, like Interlude, are held by one person or a family. You don’t get a lot of support. There isn’t much pushback in terms of questioning the strategy and looking at all the options. That can be a benefit in one sense, because you can get things done quickly, but you probably don’t have much bench strength.

Riverside has operating partners who are very involved in the portfolio companies, and there is a CFO that I report to. I like that. It makes the team bigger and there are more ideas. Every month we have an operating meeting where we go over operating metrics, and there is a defined structure to do that. It leads to a robust strategic-planning process and a more defined growth strategy.

Also, at a regular private company, all your eggs are in one basket. At a portfolio company, you still have some of that risk, but your owner may have investments in different industries. If something goes wrong with your industry — as was the case with the furniture business during the recession — you might have a safety net to find the next right position.

I’d heard a lot of horror stories from people at companies I used to work for that were bought by PE firms. Some firms focus on flipping companies within a year or two, but Riverside’s holding periods are much longer, more like five to seven years.

From an intellectual standpoint, private equity is harder than public or non-PE private. But I enjoy it. You know, the grass is always greener. When I was a public-company CFO I was always getting picked up by a limo to go to the airport. Now I get in a car and drive myself, saying, “Man, I really miss that limo.” But I have more control over my day-to-day operations, I’m a contributing member of a team, and I’m moving a small company quickly.

CFO: Opal Ferraro
Company: PSA Healthcare, a 4,000-employee private nursing firm
Start date: May 2010
PE owners: Portfolio Logic, D3 Funds

For 10 years I was CFO at a start-up retailer, Babbage’s, that we took public and later merged with other companies. But I really enjoyed moving to the private side.

At a public company, the repercussions of being wrong about anything are pretty severe. There is enormous public pressure to meet numbers in the next few weeks and achieve a certain price point. With any little fluctuation in the market, regardless of whether it has anything to do with the business, the phone rings and your day is taken up with investor relations.

There’s pressure in private equity, too, of course. I’ve been with three PE-backed companies, and each investor had its own style and ways of applying pressure. Success is a matter of adapting. You learn what’s important to the owners and manage to that.

I still feel the same obligation as on the public side, from a fiduciary standpoint, to make all the right decisions at the highest level. But the repercussions are not public. You deal with the owners on a very eye-to-eye basis.

Clearly, as a CFO in a private equity–owned company, you’ve got to drive toward an exit. But there are milestones along the way. Perhaps it’s a turnaround situation, and success is the result of that. Maybe the owners want to roll up several companies, and there’s success in that. Maybe there is a growth opportunity that has not been exploited by previous management. It gets back to understanding the owners’ point of view and tailoring your actions, reporting, and dealings with the board toward that.

But there is nothing about ownership that keeps me awake at night. My concerns are about growing the business and focusing on issues we have. For example, I have to be cognizant that we are in the health-care industry, because there are societal and legislative things going on that we have to react to in order to manage the business.

If you’re considering a job in private equity, look at the business issues, but do not shirk full due diligence on the people you’re going to work with. It’s a very personal relationship.