How a CFO can adapt to PE ownership

Private equity-backed CFOs and their sponsors navigate complex relationships that are rooted in shared goals, but the parties often come from different perspectives. And a recent trend toward extended hold times for portfolio companies means CFOs and their sponsors—the purse holders and growth architects—are spending more time together.

Not all CFOs will think that’s a good thing. Not to fret, though. CFOs coming into a PE-backed company will find general alignment between the sponsor’s goals and those of the finance department.

For example, a CFO’s cost discipline goals are not detached from a sponsor’s goals for growth, and they should be thought of in tandem rather than competitively, finance and private equity consultancy Riveron CFO Tony Ciotti told CFO Brew.

“Cost discipline and growth are…mutually reinforcing when they’re done correctly. And in a PE-backed environment, contrary to popular belief, the goal is not to dramatically cut costs,” Ciotti added. “We’re all focused on the same thing, which is creating sustainable enterprise value. Regardless of short term, long term, that is the big goal.”

Study up. While the priorities of a PE sponsor and CFO do mostly align, investment banking advisory firm Portage Point’s Barclay Stanton, managing director and head of office of the CFO, said many CFOs simply do not “anticipate the breadth of questions” the sponsor will ask about the company’s market position.

“A really good board package or financial reporting package…facilitates a very strategic conversation with the sponsors, the board, and the owners of the business around, ‘What’s happening? Why is it happening? What are we going to do to either keep that happening, change that, or make that not happen again?’” Stanton added.

These conversations are where CFOs come in, to align desired outcomes and bridge the gap with sponsors on what costs “might support scalable growth, and ones that maybe don’t, or aren’t yet creating meaningful value,” Ciotti said.

“Generally speaking,” though, coming in as a CFO to a PE-backed company is “a very hard job,” Stanton said. “There’s so much that the sponsor is focused on, and I think a lot of times when the portfolio company CFO starts, they don’t have the benefit of all that context, and sometimes they’re also just very new.”

Clear communication. “Sponsors appreciate transparency,” Ciotti said. It may be tempting for a CFO to downplay bad news, but the faster a CFO communicates concerns to their sponsor, the faster they can be addressed, he explained.

“When assumptions need to change, when new risks emerge, trust is built through consistency and honesty. I firmly believe that, and it’s not through delivering perfect results,” he said.

A CFO must also be able to first interpret and then communicate the sponsor’s goals for the company to other C-suite executives and the finance team, Stanton said.

“There is a value creation plan that is linked to [the] investment thesis, how they’re going to create value through that investment. What there should be, then…and this is where sort of the communication gets a little murky and blurry, is there should be metrics and tangible measures to be able to measure progress against that value creation plan.”

“The last piece where it gets murkier still is, you then need to be able to tell that story to your business partners, your marketing officer, your chief revenue officer, your chief operating officer, about, ‘Hey, these are the metrics that are important for your group and your division. And by the way, here’s how it links back to the broader value creation plan and the broader investment thesis that the sponsor underwrote,’” Stanton added.

The reward. As CFO at Riveron, whose investors include Kohlberg affiliates, HIG Capital, and Blackstone, Ciotti said he focuses on “accelerating growth, strengthening profitability, building capabilities, [and] increasing long-term value for the business.”

“I think my responsibility to my sponsors and to my firm is to ensure we have financial infrastructure, operating discipline, [and a] decision-making framework that support that value creation journey,” Ciotti added.

When the portfolio company and sponsors achieve alignment is when Ciotti says his job is “really rewarding,” because “the leash comes off” for the CFO.“You can run fast, you can make decisions with great conviction, you can create significantly more value than either side could independently, and again, this all comes back to trust; it comes back to collaboration,” he concluded.