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For CFOs who may be of a mind to hook up with a private equity-backed company, open your eyes wide and tread very carefully.
When speaking with senior financial executives about their career aspirations, the conversation often turns to a desire to work for a private equity-backed company. I am talking about a large majority of respondents here – at least 70 percent. When I ask why, the answer invariably focuses on the opportunity to participate in a transaction and the potential financial rewards to be reaped by doing so.
That is a pretty naïve answer. For every success story out there in private equity-backed firms, there are many more failures. Working in private equity is difficult, particularly for a CFO. Any financial officer contemplating making this type of move for the first time in his or her career must to go into it with eyes wide open. At a bare minimum, consider the following:
1. Not all private equity sponsors are created equal. The industry is not monolithic. In addition to industry specialization, private equity differentiates by what type of asset each firm considers. Is the firm buying the asset to clean up the balance sheet and quickly turn it over? Is the investment for long-term growth? Does the private equity firm have a habit of breaking up the companies in which it invests? CFOs contemplating such a move should investigate how the private equity firm’s end game matches up with its strengths, experience and – most importantly – what motivates them to come into work every day.
2. The exit will be what the exit will be (and so will the reward). When the offer comes, an equity payout of five times the annual compensation over three years looks pretty good. How does it look over four years or even six? How does it look at three times? How diluted might that investment be in case of additional rounds of financing? These are all questions an executive must answer before joining the team.
When speaking with CFOs currently in private equity-backed firms about their compensation, it becomes apparent that, in a large number of cases, the CFO would have done better financially taking a role in a public company where long-term incentive payouts are more predictable, if less exciting. We all get hyped up about a grand slam, but how satisfied will we be with a single or a double?
3. The CFO is usually the CCO (chief change officer). No private equity firm makes an investment in a company and then sits back and lets things run the way they always have. If firms did, they would be managing a money market fund at Vanguard instead of a buyout fund. At a private equity-backed company, change will be required, it will be disruptive, it will be resisted and it will be painful.
The CFO, in collaboration with the CEO, will direct this change effort. In the majority of cases, CFOs can quickly identify the steps that need to be taken but quite often can’t execute those changes in an effective way, mostly due to a lack of the required leadership skills. A private equity-backed company CFO must be a strong visionary and communicator, overcome the resistance of legacy executives and be able to motivate a team to achieve a common goal.
4. CFOs balance on a razor’s edge in private equity-backed companies. The CFO usually serves as the main conduit of information flow between the company and its financial sponsor, even more so than the CEO. Finance chiefs must be able to balance the desires of the company’s private equity owner with those of its management team, often when those goals are not aligned. If the divergence is too great, the position becomes untenable. I know of a very competent CFO who routinely showed up to work broken out in hives the day after a board meeting because of the stress.
A CFO contemplating a move into a private equity-backed firm should try to connect with a peer or two who have worked for that owner to assess whether the relationship can be appropriately managed. CFOs should also give close scrutiny to the backgrounds of the board members. Were they senior operators in their previous lives, or financial wizards? It makes a difference.
5. The CFO in a private equity-backed environment often leads a nomadic existence. A CFO who chooses to work for a private equity-backed company should expect to be looking for a job within three to four years of joining the company. It’s the nature of the game. More often than not the management team exits when the private equity firm does, hopefully with a nice check in their back pockets. If financial executives are not comfortable with this instability, then private equity is not for them. I’ve had a good number of conversations with financial officers who ask me how to get out of private equity. If you do two or three of these deals in succession, you tend to get typecast.
These considerations are not to say that a CFO should without question shy away from private equity-backed career options. The companies move fast, are dynamic and will test every skill the CFO possesses. Working in a private equity-backed company can be an exhilarating career experience. But to say it’s not for everyone is an understatement. Financial executives should thoroughly research the pros and cons of a private equity-backed organization before accepting a position, especially if it’s their first time working in that environment.
When senior financial officer candidates tell me how much private equity intrigues them, I direct them to talk with a CFO friend who is struggling to come up with an additional $30 million this quarter to meet the debt-service requirement on the overleveraged deal that his private equity firm got the company into. That conversation quickly separates the pretenders from the true believers.