How private equity investors can get the most from their CFO

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GPs may be eager to leverage the talents of portfolio company CFOs, but managing the tactical responsibilities of the finance department can interfere with the CFO’s ability to develop larger strategic initiatives. Consero Global’s Natalie Townsend suggests how PE firms can make the most of their Chief Finance Officer’s real skills.

PE fundraising may be booming these days, but that’s also creating sticker shock for assets. So GPs have to drastically improve a business to warrant the price, putting pressure on the portfolio company’s senior management team to make major strides. And the CFO plays a big role.

But for a lot of middle market businesses, running the finance department is a full-time task and leaves little room for that CFO to work closely with the CEO to restructure, or more to the point, revolutionize that business. That is why some GPs have begun outsourcing the accounting and finance function to Consero, so that CFOs can move beyond the day-to day duties and focus on bigger strategic initiatives.

“A lot of PE firms we meet with are frustrated that as much as they want a more strategic CFO, most of the time these executives get mired in the details of the finance departments,” says Natalie Townsend of Consero Global. “They may hire talented folks, but they only get to use a fraction of their actual capabilities.”

“I’ve always strived to back or hire strategic CFOs,” says Scott Donaldson of CIC Partners. “But it’s hard to manage the finance and accounting functions while contributing to strategic initiatives, so they often don’t flourish as much as we’d hope in these situations.”

It might seem natural that the CFO spend time on such operational tasks as closing the books each month, generating financial reports, making sure all transactional processing is taking place and that they can get through an audit with timely and accurate information. Beyond that, they often ensure systems are scalable so if the business were to grow, accounting and finance wouldn’t slow that down. That’s not even addressing the HR component, when the CFO has to find a replacement when staff leaves.

In large companies, there might be enough resources to minimize the CFO’s role in these tasks, but on the lower end of the middle market, finance can be quite leanly staffed. “So at Consero, we take all those tasks off the CFO’s desk, so they don’t have to worry about staffing or systems upgrades,” says Townsend. “And if any of the operational tasks aren’t completed to expectations, that CFO knows they can hold us accountable.”

Tapping Consero’s Finance as a Service (FaaS) allows smaller companies to upgrade their accounting and finance teams in a fraction of the time a CFO would be able to build a new team from scratch. “The nature of private equity is to act quickly, and Consero allows the CFO to shift gears from the basics to assessing larger changes to the business, which is exactly the type of work that attracts top tier finance chiefs,” says Townsend.

She explains it’s really an alignment of interests, since the CFO gets to focus their attention on the high impact activities, while Consero leverages their expertise in providing best in class service in these tactical areas.

“Make no mistake, the tactical duties of the finance department have to be accomplished with speed, accuracy and care,” says Townsend. “Especially since poorly managed books can trip up the due diligence process when the PE firm is looking to sell the business. That’s the table stakes here.”

With the tactical side of the finance department handled, some PE firms are finding novel ways to leverage their CFO talent. “Some smaller enterprises don’t have enough truly “strategic” work to interest major talent,” says Townsend. “But that doesn’t mean those companies don’t need great ideas and someone to guide them to fruition, so they might put the CFO to work at two or three portfolio companies to create a full-time slate of work.” This way, each smaller company gets the benefit of a talent they couldn’t afford full time, and that CFO remains intellectually challenged.

There might be a CFO that actually wants to manage those tactical activities, but they may not be the ideal CFO for a PE-owned business. “If that CFO wants to devote themselves to the basics, they might be more suited to a Controller role and not the right fit for a radical improvement plan,” cautions Townsend. And there are plenty of these standard issue CFOs/Controllers at the lower end of the middle market.

This doesn’t mean that PE firms need to settle. “Consero has been really useful in upgrading the finance and accounting functions in portfolio companies, which enables higher caliber CFOs to focus deliver the investment case,” says Donaldson.

And these days, that investment case is most likely ambitious, which means that the basics need to be handled, because only real innovation and strategic thinking will deliver exits that will make the price of that asset a little less shocking.