A recent report by Alix Partners highlighted a surprising number of disconnects between CFOs and their private equity sponsors. I have worked with over a dozen CFOs in my career and ten of them were some of the smartest and most effective executives I had ever known. Two of them were not (one was a crook and the other was just incompetent). I have worked as an executive for three firms that were owned by private equity firms. I was a little surprised, but not shocked, at what this report highlighted.
Alix Partners is a billion dollar plus management consulting firm headquartered in New York City. They regularly publish a lot of thought leadership pieces and insights, including periodic studies of private equity. Earlier this year they published two pieces The Annual Private Equity Leadership Survey and Taking Charge in the First 100 Days. The studies had a reasonable base and acceptable margin of error. As described in the forward of the survey:
Accordion, in conjunction with Wakefield Research, among 200 total participants—including 100 private equity (PE) sponsors (senior executives) and 100 chief financial officers (CFOs) at private equity-backed companies with $50 million or more in annual revenue. The CFO and PE sponsor samples were collected in the first quarter of 2019, using an email invitation and an online survey.
The results of any sample are subject to sampling variation. The magnitude of the variation is measurable and is affected by the number of survey respondents and the level of the percentages expressing the results. For the surveys conducted in this particular study, the chances are 95 in 100 that a survey result does not vary, plus or minus, by more than 9.8 percentage points, in either the CFO or PE sponsor sample, from the result that would be obtained if surveys had been conducted with all persons represented by the samples.
Here are eight findings from the report.
An Uncollaborative Relationship
The first thing that struck me was how all parties – Private Equity, CEOs, and CFOs cited an uncollaborative relationship as a major concern:
M&A and Completing an Exit or Sale
There was a fair degree of agreement on areas that Finance should focus on in the next year, but a surprising disconnect on the topics of M&A as well as completing an exit or sale. My experiences were different. I was a corporate development exec for two different enterprises owned by private equity firms. While my focus was almost exclusively M&A, I felt that the CFOs I worked with shared the same sense of priority on M&A as our sponsors. At the end of the day the sponsors were looking for a return on their investment. M&A and ultimately an exit were the most common way of achieving that goal.
Contribution to CFO Success
The disconnect between what PE firms felt their contribution to success and what CFOs perceived their contribution to be were striking:
Value Creation Strategies
There was strong agreement regarding value creation strategies. The CFOs emphasis on deleveraging is not a surprise. One of my private equity sponsors was fond of saying “Debt increases equity returns”. They didn’t have to live with the impact of debt service constraining investment in operations or covenant compliance.
There was strong agreement regarding the areas where private equity sponsors and CFOs felt that CFOs need operational guidance, except for one topic – Performance Improvement.
Are Reporting Requirements Fair?
It is no surprise that there is a strong difference of opinion regarding PE sponsor reporting requirements:
Not surprisingly, CFOs are concerned about their job security.
Being a CFO in a private equity sponsored company is tough. It is not a surprise that there are disconnects in perceptions between sponsors and their CFOs. In my experience as an executive in multiple firms owned by private equity I can categorically state that CFOs were one of the primary reasons for the returns and exits that were achieved.
Also published on Medium.