02/11/2023

The Evolving Role of CFOs in Private Equity Amid a Shifting Economic Landscape

The Evolving Role of CFOs in Private Equity Amid a Shifting Economic Landscape

Consistently reviewing the economic landscape is a priority for all business leaders and especially CFOs who are often business partners with their MD/CEO and Board. This is particularly the case in Private Equity owned companies where the global economy directly affects their investment strategy. It has been reported that the recent economic uncertainty has led to a marked deceleration in investment activity. Specifically, a -30% contraction in investment market volume between Q1 2022 and Q1 2023. As PE firms adjust their strategies, so does the role of the Chief Financial Officer.

Someone knocks on the Chief Finance Officer's office door.

Despite the slow-down in equity growth, there is still strong demand for outstanding CFO and financial leaders within the PE Sector. In many cases though, the requirements for the role have changed, and thus PE firms are looking for different traits in potential candidates. Investment volume may be down, but aggregate value has steadily increased quarter by quarter, meaning a well-executed deal in the right place is even more significant. Appointing the CFO with the commercial skills and experience to navigate through this ever-changing market has never been so integral to PE firms who are scaling their business portfolios.

The Altered CFO Mandate in Private Equity

In the immediate post-pandemic era, Private Equity CFOs were predominantly needed to oversee new acquisitions and transferring financial management. Nowadays, however, firms are much more risk averse. Buying new firms is not on a priority in many cases, and instead they are choosing to shore up existing assets.

As a result, CFOs are required to become architects of performance enhancement within current portfolio companies. The focus has turned to extracting maximum value from current investments and CFOs are now preoccupied with cultivating operational efficiency, streamlining processes, and driving growth within these firms.

The CFO reviews an employees work

The search for a new CFO now prioritises meticulous money management as well as the ability to foster strong banking relationships. Operational competency within each firm’s specialist field is also desirable as a CFO who understands the day-to-day workings of their portfolio companies will be better positioned to advise on improving efficiencies.

More than this, a growing preference for experience CFOs underscores the risk-averse stance that PE firms are taking. Firms are less likely to take a leap of faith with individuals on the cusp of the CFO role. Rather, they are seeking seasoned executives who can seamlessly step into the leadership vacuum. Those who are currently looking for their step up into the C-Suite will be more likely to find that opportunity in an internal promotion.

The Current Trends for Hiring CFOs in Private Equity. IN: Skilled in existing business optimisation, operational efficiency, and experienced in CFO role. OUT: Skilled in new business acquisition, risk-taker, and promoting into first CFO role.

More generally, Private Equity firms are focusing on diversity in their recruitment strategies. According to EY’s 2023 Global Private Equity Survey, 49% of PE managers surveyed list increasing diversity as a top priority, and 41% listed creating an inclusive culture.

Following through on these ambitions, however, is proving difficult. Globally and across all sectors, 82% of CFO appointments made in 2022 were still male. More shockingly though, in Private Equity alone, female appointments decreased from 36% in 2021 to 23% 2022. As for racial and ethnicity diversity, only 10.9% of 2022’s Fortune 500 and S&P 500 companies had non-white CFOs.

If Private Equity firms are determined to recruit only experienced CFOs, their candidate pool is not going to give them a diverse selection. Those firms which do act on their diversity promises will likely build a more diverse team outside the C-Suite and promote internally, so as not to compromise on the lack of experience for their top job.

Navigating Professional Ambitions for CFOs

Of course, hiring talent is a two-way street. Just as CFOs must consider what Private Equity firms are looking for from them, the firms must also consider what they can do for prospective CFOs. There is a good chance to acquire top talent, as Bronzegate reports 75% of PE CFOs would be open to moving to a new opportunity in the next 12 months. Hiring firms need to put themselves in their candidates’ shoes when planning how to attract the best CFO talent.

CFO leads a productive team meeting

The changing economic climate has ramifications for how existing CFOs are planning their career trajectories, especially when they are seeking an entry point into working within Private Equity. Equity shares from underperforming firms might yield disappointing returns, prompting CFOs to contemplate strategic moves where they might expect a better return on their tenure. When considering a move to a new firm, CFOs will be interested to know the scope for potential improvement in portfolio companies. Firms with marginal prospects will need to find other ways to attract CFOs.

Moreover, an upcoming general election brings with it the potential for legislative changes. A new government is likely to reconsider capital gains relief, either by reducing it or eliminating it entirely. CFOs are therefore likely to strategize their career moves based on this uncertainty. In order to mitigate potential losses, CFOs will be tempted by higher base salaries and comprehensive benefits packages.

In conclusion, the role of CFO within private equity is inextricably linked to the economic landscape. Despite the sluggish investment market, the value of a well-executed deal remains has only increased, making it all the more important to make the right CFO hire.

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