Step-by-Step Guide to Hiring a CFO for PE-backed Businesses: Strategies and Scorecard

Ott Niggulis

The role of a private equity-backed Chief Financial Officer (CFO) is multifaceted and has significantly evolved to meet the growing complexities of the financial landscape.

Beyond traditional accounting and reporting functions, the modern PE-backed CFO is a strategic partner to the CEO and other C-suite executives. They are involved in shaping the company's direction and strategy, including mergers and acquisitions, fundraising, and long-term financial planning.

In fact, 82% of private equity investors believe that a successful CFO can have a fundamental impact on the creation of business value. And they are not afraid to replace CFOs who fail to understand their strategic role in driving value. Research shows that only 25% of existing CFOs stay in place post-deal.

In this guide, we’ll zero in on how the CFO role has changed from pure financial management into a strategic leadership role, the central role of talent management, and the expanded operational and strategic responsibilities of a modern PE-backed CFO.

From Financial Management to Strategic Leadership

Traditionally, PE-backed CFOs were primarily seen as financial gatekeepers, focusing on accounting, reporting, and compliance. Today, they are considered strategic partners, playing a crucial role in shaping the company's strategic direction, driving growth, and operational efficiency.

Modern PE-backed CFOs are not just leaders of the finance function, they are strategic advisors to other members of the C-suite, providing the analysis and data needed to manage the portfolio company and make the right business decisions. They are instrumental in not just financial outcomes, but the overall competitive position and success of the business.

They are actively involved in identifying opportunities for growth, cost optimization, and operational improvements that align with the investors' exit strategy. They are key players in decisions regarding technology investments, human resources, and even marketing strategies.

The CFO as Chief Value Extractor

This shift from a traditional finance role to a strategic decision-maker is underpinned by the use of various forms of data and technology to make sense of it all. CFOs are expected to design and utilise complex financial models to inform strategic decision-making, predict future revenue streams, and assess risks. 

In essence, the role of a CFO is transitioning into a “Chief Value Extractor” who can make an immediate and significant contribution. And those that can combine these analytical skills with a strategic mindset are being rewarded handily by private equity firms.

People are the key

When PE-backed CFOs are asked to rank priorities, they continually place talent management at the top of the list (right after asset growth). Be it scaling with the growth, retaining top talent, or implementing diversity, equity and inclusiveness (DEI) programs.

The ability to attract and retain top talent is a key differentiator, and those that consistently succeed in this area are able to generate superior returns for their investors. Private equity firms themselves rank talent management as a key strategic priority for running a successful business.

With their strategic influence, CFOs are pivotal in empowering talented and engaged employees to lead initiatives that align with the investment thesis, thereby democratising value creation beyond the finance function. Doing that, they are cultivating an inclusive work environment and ensuring a diverse range of perspectives and skills within the company's talent pool.

CFOs are also uniquely positioned to influence company culture. By advocating for and allocating resources towards DEI programs, CFOs demonstrate a commitment to creating a workplace that values diverse perspectives and backgrounds. This involves not just support in terms of budget allocations but also in setting measurable goals and KPIs to track progress in these areas.

Operational and Strategic Responsibilities

In their role as Chief Value Extractor, CFOs are increasingly involved in areas like IT, HR, legal, and even supply chain management. This more operational focus goes hand in hand with the overall strategic shift towards extracting value from each corner of the company. This requires them to have a broad understanding of various business operations and how they intersect with the company's financial health.

This expanded role of CFOs is also reflected in their growing involvement with strategic decision-making. They are not just reporting on the financial health of the company but also advising on strategic initiatives like mergers and acquisitions, market expansions, and capital investments.

Collaborating closely with the CEO, the CFO acts as a strategic thought partner, and thus are expected to be creative and capable of thinking broadly about various business issues, encompassing all aspects of the company’s operations and strategy.

By maintaining a thorough grasp of the finance function and a clear understanding of the primary drivers of value creation, the CFO can effectively influence and challenge decisions within the portfolio company by holding key leaders accountable. Particularly in cases where optimism or focus might not align with broader company goals.

The unique challenges of PE CFOs

Private equity backed companies create unique challenges for CFOs, challenges that are unlikely to come up in traditional corporate environments. These challenges are primarily driven by the nature of PE investments with aggressive growth targets and a focus on rapid value creation.

CFOs are tasked with driving growth and achieving scale at a rapid pace along with, often, substantial organisational transformation. All this requires significant investment, both financial and human, with the CFO playing a key role in deciding where and how these investments are made.

There is also the constant pressure to improve profitability, optimise costs, and enhance the overall financial health of the company along with stringent reporting standards to the PE investors who demand detailed and frequent updates on financial performance, cash flow, and other key metrics. 

In such a high-pressure environment, it’s the CFO's ability to adapt to rapid changes, manage complex financial landscapes, and align various operational and strategic initiatives under the pressure of PE expectations that will ultimately decide if they’re successful or not.

Conclusions

Today's PE-backed CFOs are not just financial stewards but strategic partners to the CEO and the wider C-suite, playing an instrumental role in shaping the future direction of their companies.

With their unique blend of skills and experiences, CFOs must balance the knowledge gleaned from large-scale enterprises with the agility and entrepreneurial spirit required in more dynamic, smaller settings. This duality is crucial, as it allows CFOs to navigate the complex challenges unique to PE-backed environments, where rapid growth and value creation are paramount.

As the private equity landscape continues to evolve, the role of the CFO will increasingly centre on being a strategic driver of value and growth.  For a deeper understanding of this role, the accompanying PE-backed CFO scorecard provides a valuable benchmarking tool.