Below Dan Adler, Partner at Lyceum Capital, explains why the FD has a unique leadership role in a private equity-backed business.
The finance director in a private equity-owned business is a partner to the CEO in delivering the growth plan and he or she is equally accountable. In addition to strong financial skills, an FD needs to show leadership, be decisive and hands-on, and be able to perform at a demanding pace. Being a private equity FD is a high profile and multifaceted role, with responsibilities far broader than would be expected of one in a typical corporate setting.
As investors, our role in appointing an FD is to support the CEO’s decision, although we find that the best hires are people with whom we can also build a relationship. They understand what we are trying to achieve and our goals align. Like the CEO, any FD within a portfolio business must be committed to the growth strategy. Finding the right talent is critical to the success of any investment.
Within the leadership team, the relationship between the CEO and FD is the central axis that determines the successful implementation of the value creation plan – the roadmap for growth – and ultimately the success of the deal. Building that relationship requires mutual confidence. Ideally, the skills and experience of the FD and CEO complement each other and not just in finance but in operations too.
In addition to typical finance functions, such as cash flow and budgeting, the FD is expected to take responsibility for business-wide initiatives that enable growth, for example successfully executing a buy and build strategy and the efficient integration of add-on investments in pursuit of synergies. Demands on an FD’s skillset will continue to rise as the business grows. Any FD working in a private equity-backed business needs to continuously acquire competencies that will support the business as it moves along its growth trajectory.
Although an FD within a portfolio company is required to work independently; transforming a business is a team effort. When recruiting a finance team, picking the right talent and incentivising hires appropriately is vital, as is defining targets and KPIs upfront. Of those hires, recruiting a strong financial controller is key. Like the FD, the finance team needs to understand the demands and rewards of the private equity journey. The goal of an effective FD should be to establish robust processes and controls that could function without him or her, if necessary.
Grappling with issues
The path to value creation is almost never a straight line and FDs need to be good problem solvers. Being able to stick to the growth plan engenders confidence, but inevitably challenges arise. In our experience, successful FDs do not wait to flag issues or delays, or worse, hide them. They are upfront and have the courage to admit early on that something is not working. They communicate consistently with shareholders and the board and are able to revise plans to get back on track. The best FDs have read everything, are informed and have answers ready. The FD role is a leadership position that requires interaction with the business at large, both internally and externally.
Ensuring good governance
A PE-backed company is always ready to enter into ownership discussions. Its books, processes and controls must always be ready for scrutiny. As one FD told us, part of his job is to “make sure everything is tidy”. This may require, for instance, preparing accounts in a dual format for the UK and US if the ultimate buyer is expected to be a US-based entity. This can save time in the long run and increases the confidence of a US buyer in the information provided.
As investors, one of our goals is always to professionalise the organisation of a portfolio company, including processes, roles and functions. Ensuring the business meets industry best practice and is compliant with current regulations is central to its evolution. The FD plays a key role in enforcing proper governance. The consequences of failing to meet standards, including loss of market position and reputational damage, will harm value creation. Conversely, by instilling solid governance, the FD assists growth and builds value for all concerned. Effective compliance procedures are inevitably reflected in the valuation of a business.
The financial rewards of working in a private equity-backed business can be high. However, in our experience, the most effective FDs are always more motivated by the challenge and excitement of growing a business. Ultimately the FD is the guardian of the integrity of the deal. He or she is a central figure in creating value, with an impact on both profits and the business’s ultimate valuation.