More than just having a job
By: Richard Young
Published: April 30, 2007
We recently revealed what private equity managers' think about their investee finance executives. That survey elicited some really interesting feedback... from FDs in PE-backed businesses. Seems they recognise the attitudes we uncovered – and they've given a few observations about life as a PE-backed finance leader, too.
First, though, a recap: our survey of private equity managers found that they like MBO FDs to have leadership experience; that they prize accuracy and openness above all other attributes in investee FDs; that PE investors focus on cash and sales – more esoteric reporting, such as brand valuation, hardly matters; and that areas such as staff training are less important – PE-backed finance functions should focus on using up-to-date systems to produce accurate, timely reports. (You can read the whole article about the survey here.)
'This is spot on, from both my personal experience in the PE world and from what I would inherently assume,' said one reader. 'The only thing I would also expect is for the FD to get commercially involved right across the business. This might be implicit in the responses from the PE managers, but is something that many finance people don't deliver – they stay locked in their offices!'
But while wider commercial involvement is becoming a given for every FD, not just those in PE-backed business, some of the specifics about backed businesses also struck a chord.
A face that fits
Many of the FDs and FCs who wrote in agreed that finance executives need to chart a delicate course between their fellow managers and their principle shareholders. 'Do not underestimate the importance of the management style – investors need to know the FD will fit in with the existing team and will assess accordingly whilst recruiting,' said one correspondent. 'There are many different approaches, but on balance PE managers seem to prefer a strong FD with an absolute focus on shareholder value creation, even if this does cause some friction with the management. Cash control, forecasting and accurate monthly accounts are the bread and butter. This is more black and white – you either do it or you don't – and gets found out quickly.'
The PE culture
Although these 'bread and butter' roles will come naturally to many finance execs, it's also clear that you need to manage upwards. That's true with any chairman, group of non-execs or investors, of course. But a couple of our correspondents made it clear that the PE investors needs special care and attention.
One FD felt that less experienced PE investment managers can jump to quick judgments about people and processes without really understanding the detail that goes into the business. 'It would be great if they could spend some time in investee companies in an executive capacity, as this would enable them to gain a more solid appreciation of the work of the management teams and the staff that they employ,' said another FD. 'It's also important to buy time that will be needed to change established procedures within a newly PE-backed company in order to cater for the new requirements.' In short, it's important for the FD or FC to manage expectations and communicate clearly and concisely to draw in their PE manager as constructively as possible.
Know the ground
Most of the reaction to the survey acknowledged that there was a pretty straightforward trade-off to meeting the demands of private equity ownership that boils down to: know what your investor wants – and then deliver. 'This is the real world,' said one FD. 'PE firms are in the game for a turn on the investment and the trick to learn is that investee management teams must be in the game of management upwards to satisfy their needs.'
At the outset of a PE relationship, we were told, it is important for the PE firm to give clear guidance as to what it expects so that the incumbent management team can put in place the processes that it needs to be able to satisfy the demand. 'Each side must become good communicators,' another FD said, 'so that the expectation gap is bridged and the teams can work together. Tolerance is required on both sides and through this approach people will be able to give of their best.'
In the survey, PE managers made it clear that they want hard work and results from their management teams. But some of the FDs who got in touch cautioned against trying to do too much, despite this pressure. 'It's important for the CFO to recognise that they can't do it all themselves,' said one. 'It is critical to build the right small team around you and to make sure they are properly motivated and incentivised.'
This FD is the latest in a line at his PE-backed business and he warned us that his predecessors had tried to be both FD and FC. That's probably doable in a very small company. 'But if you try to do this in a larger deal you will spread yourself too thinly,' he said. 'Once you have a group with several businesses and an international dimension, you will never be able to keep track of all the detail and work effectively at board level without help. But remember: you don't have very long to get your team in and make it work!' His last point, of course, was made even more strongly by the PE managers we spoke to.
Hard and soft skills
The PE managers also stressed the importance of timely and reliable information and of cash management. These core skills are the FD or FC's opportunity to delight their backers. 'It also highlights the importance of sales forecasting,' said one PE-backed FD. 'Financial forecasts become easier and the information more dependable if sales forecasts are accurate. Many owner managed businesses do not understand or put enough emphasis on how important this is!'
Getting that information requires the co-operation of other board members and an ability to make them understand the importance of their contribution to the business. It's also important for the finance chief to deliver commercial information back to other members of the management team – particularly on the metrics the PE backers will be looking at most closely – so that mutual trust and respect can develop. Which brings us to the key soft skill that the original PE manager survey highlighted: communication.
'That comes through strongly in your article,' said one FD. 'I have found that this is all the more important when you find that things are not 100 per cent right. You have to clearly identify the problem and enunciate how you are dealing with it and tell your board when it is done – and you need to be able to communicate all of this in accessible language without hiding behind accounting jargon.' Another vital element is the relationship between the CEO and the FD: 'They should be like-minded, moving the business forward but not afraid to have open honest debates.'
The equity investors also need to be kept in the loop. 'Their reputation depends upon the FD and the quality of information provided by him,' said another FD. 'Make them a star and they will bend over backwards to help you.' A great tip. But we'll leave the last word to an FD who offered some great advice if you're thinking about joining a PE-backed business: 'Anyone planning to work for an investment house either directly or indirectly needs to fully understand that it's very different from just 'having a job'.'
The survey was conducted by Equity FD and EquityFC.