Unleashing the CFO-CEO-Deal Executive Partnership with Kevin O'Neill

Acertitude Co-Founder and Managing Partner Kevin O’Neill had the opportunity to sit down with a panel of esteemed deal executives at the PEI Operating Partners Forum: Virtual Experience 2020, the world’s largest event dedicated to best practices in private equity portfolio operations and value creation. The panel, titled “How to Recruit Brilliant CFOs and Unleash the CFO-CEO-OP Partnership,” focused on topics and questions such as:

• What makes an ideal private equity CFO?
• How has the portfolio company CFO role evolved?
• How do you identify and attract in-demand CFOs?
• What’s the best way to set CFOs up for success?
• And how do you succeed in the CFO-CEO-OP matrix?

The following are key insights from the discussion, which come at a crucial point in history for portfolio valuations impacting fund returns.

Makings of brilliant CFOs

When discussing the most important qualities of portfolio company CFOs, panelists stressed M&A, speed, people, and team-building capabilities. Due to high multiples, one of the deal executives noted, the only way to win is through heroic organic growth or an M&A playbook. Consequently, executing acquisitions, working with lenders, tracking relationships with bankers, and assessing for synergies are sought-after capabilities in PE CFOs.

A PE CFO must be a capable finance leader and a savvy business leader — someone who effectively partners with the CEO, influences peers, and communicates well. The best CFOs take a hands-on, multifaceted approach to business and to serving different departments. While sector expertise and prior private equity experience are helpful, the experts agreed that the true mark of a PE CFO is someone who deeply understands the core of a portfolio company’s revenue model and KPIs.

Finding fit

In the initial stages of the recruitment process, early calibration and alignment around the profile are critical. All relevant parties — especially the CEO — should provide input during kick-off, well before interviews occur. Often, the best strategy for achieving alignment is to build and agree upon a Job Scorecard with three specific components: mission, outcomes, and competencies.

The panelists agreed that getting creative with the CFO profile also yields excellent outcomes — the Big Four audit track is not the only path to a successful CFO. Strategy consulting, investment banking, and corporate development are also valid and valued backgrounds, as is operating experience.

To help make the recruitment process seamless and repeatable, the deal executives recommended using creative diagnostic tools, third-party firms, and other resources. Furthermore, using case studies and realistic scenarios can help predict how CFOs will perform on the job. For instance, a panelist shared that one of their best practices is to present a broken model and ask candidates to identify errors. They also conduct this exercise with sitting CFOs to get a useful benchmark to measure against.

The operating partners also mentioned a common watch-out during leadership assessment: focusing too much on determining whether a CFO candidate is “good” or “bad” rather than the right fit. The better question to ask: “Can the CFO can get us where we need to go during the hold period?” It’s critical to work backward, getting clear on your investment strategy — how you want to transform the portfolio company during the investment window — and then cascade that down to what the leadership team and CFO need to do to get you there.

When measuring these competencies and outcomes, the experts all pointed to the importance of involving the CEO throughout the recruitment process and getting their buy-in. Knowing how critical it is to establish a partnership well beyond a reporting relationship between the CFO and CEO, the CEO would be wise to spend time with candidates on a personal level. The same notion applies to other hiring decision makers. Whether getting coffee, playing golf, or sharing a meal with their family, quality time outside the interview room will offer a more robust picture of the CFO’s culture fit and EQ.

Achieving CFO-CEO-OP alignment

The panelists agreed that alignment between the CFO, CEO, and deal executive is key. To achieve cohesion and set everyone up for success, start conversations early around the value creation plan and how the CFO can best fit into the matrix. Operating partners must be radically transparent about where CFOs need to spend their time. “This is 80% of the battle,” one OP weighed in.

Think of your role as an “interpreter” between the board, CEO, and CFO, removing friction to help the CFO move faster. Also, leverage your expertise and network across the portfolio to show the CFO how similar problems were solved elsewhere.

A brilliant CFO is critical to value creation. Therefore, it is never too soon to assess the fit of the inherited CFO and, when needed, start searching for a new one who can make your deal a success. Consider an early pipeline — or keep a roster of candidates at the ready — so the CFO search is complete (or nearly complete) the day you sign. This will level-set your PE firm to drive improvements in the portfolio and dramatically increase the value of your investment.