CFO's in private equity

12 september 2023

With sharp increases in interest rates and corrections in market valuations, the landscape in the world of private equity has significantly changed. But what does this mean for current and future CFO's in private equity?

Through discussions with our contacts in private equity, Michiel Sintnicolaas, Managing Partner at Bridgewell, explores how macro-trends are impacting the private equity CFO and what the future may hold.

The hiring of CFO's has remained steady despite predictions of a slowdown

It's no secret that the flow of private equity deals has recently slowed down. According to Bloomberg data, global private equity investments declined for the fifth consecutive quarter in the first quarter of this year. The wave of deal activity following the pandemic has subsided against the backdrop of market corrections, inflation, and challenging debt markets, leading to a sharp rise in interest rates. The slowed deal flow has left many wondering if the appointment of private equity CFO’s would also be affected.

Despite the decrease in deal activity, the number of CFO search assignments has remained nearly constant. However, it would be wrong to assume it's "business as usual." The shift in private equity investment strategies means that we are seeing a different set of recruitment priorities. After Covid, appointments of private equity CFO’s were typically the result of new acquisitions and subsequent changes in leadership and/or management teams. Now, investors seem to be more inward-focused. The current focus is on improving the performance of existing portfolio companies. Portfolio performance is being closely monitored, which means the CFO is in the spotlight.

With an increasing number of extended exit timelines, the current leadership team may no longer be optimal for the adjusted strategies from the investor's perspective. This has created interim opportunities due to the immediate changes required in teams, while searches are conducted to find longer-term solutions. At Bridgewell, we have seen an increase in the number of private equity CFO interim assignments.

Risk-averse behavior and a greater focus on cash flow make private equity firms emphasize having the right CFO's

The combined effect of the pandemic and challenging economic conditions on corporate results means that the stock values of investments may have been significantly affected. Investors are looking for more experienced candidates with strict covenants to be met, hence a greater emphasis on strong banking relationships and a clear outlook on cash flow. This is supported by data from an internal Bridgewell survey, which shows that the average age of a CFO is around 50, indicating a preference for seasoned professionals.

Expectations of potential candidates have also increased among clients. This means that the transition from a role below the CFO to a CFO role within Private Equity has become more challenging. While regular, non-PE CFO’s generally have a background as Financial Controllers, CFO’s in Private Equity usually have a stronger operational background and have previously served as the ultimate responsible CFO in another organization. This is because within PE, the CFO is more involved in daily operations and helps the organization achieve its strategic objectives.

CFO's seeking  wealth creation

Challenging business conditions and corrections in valuations are also affecting candidate behavior. The equity participation of many CFO’s in PE is often worth less than originally thought, making candidates more open to a move. Extended exit timelines contribute to this as well.

According to Bain & Company's Global Private Equity Report 2023, private equity exits decreased from $969 billion in 2021 to $565 billion in 2022. Given the slower exit potential, CFO’s may be attracted to external opportunities with shorter exit timelines or the opportunity to earn more with the same required service time. With the upcoming parliamentary elections in the Netherlands and the possibility of a change in government, CFO’s are also considering the potential impact on income expectations.

The outlook: Demand for CFO's remains

The flow of deals in the second half of this year is predicted to be larger compared to the first half; historically, this leads to an increase in both interim and permanent CFO search assignments. There is also a greater need for expertise from professionals who can assist with pre-deal due diligence and post-acquisition professionalization. Solid knowledge and experience in cash flow analysis remain one of the dominant skills of a private equity CFO. There will also be more emphasis on the operational competencies of a CFO to help strengthen value creation strategies and enhance business performance.

With interest rates likely not to approach the post-pandemic rates in the medium term, leading to ongoing downward pressure on multipliers, the importance of having a "strong" CFO is greater than ever. Private equity CFO’s will need to remain commercially and authentically oriented, with the ability to lead, influence, and challenge appropriately. Commercial skills remain of paramount importance, but detailed data, accuracy, and investor confidence remain, as always, crucial.

If you appreciate a discussion about talent acquisition, please feel free to contact us. As one of the leading executive search organizations for financial management in the Netherlands, with deep sector expertise and a network, we would love to hear from you.