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Why today’s private equity CFO has a new complexion

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Ruby Sheera

June 16th, 2022

Why today’s private equity CFO has a new complexion

Do boards, chairs and funds need to rethink their assumptions around the experience they expect from new C-suite hires? We hear from one CFO on how he was able to move successfully into a PE-backed business, having never worked in one before, and also more recently, about his experience of moving into a software business with no prior software experience.

Richard Kerr knows a robust set of accounts when he sees one. It’s an instinct formed by long experience of scouring the books of businesses with a view to acquisition.

“I’ve completed over one hundred M&A deals and looked at hundreds and hundreds of potential acquisition companies’ P&Ls,” he reckons.

That sharp eye for the likely story behind the numbers was part of a portfolio of skills that saw Richard appointed earlier this year as CFO of Advanced, the BC Partners and Vista Equity Partners-backed cloud services specialist. Richard joined Advanced following the successful sale of Exponent-backed Dennis Publishing (where he was CFO) to Future.

“Coming from M&A to being a CFO is quite a natural transition because you’ve been involved in setting and delivering inorganic strategy and in the process have led the due diligence understanding the problems and challenges within a wide variety of businesses,” Richard adds.

Yet Richard’s background could have ruled him out of the running for a CFO role in many private equity (PE) recruitment exercises.

Situation, not sector

Richard is not a qualified accountant and prior to joining Dennis Publishing had no previous PE experience. In addition, while he has an extensive background as a media CFO – including with Guardian Media Group and, most recently, the publisher Dennis – Richard had not worked in the pure tech sector before his move to Advanced.

Richard believes more PE firms should be open to considering non-accountants for CFO roles. He also sees himself as an example of how rich experience can substitute effectively for a lack of sector-specific or PE credentials.

His case is backed up by research from Leadership Dynamics, the leadership analytics product that powers DRAX. It shows that as well as being functional specialists, upper quartile CFOs in PE-backed businesses on average have higher ‘situational’ as opposed to domain or sector experience i.e., they have a proven track record in value creation beyond the sector.

As a result, strong CFOs are often more able to transition across multiple sectors and from outside private equity, if the situational experience they bring is rich.

A question of qualifications

In the US, the proportion of certified accountants among the ranks of CFOs in top public companies dropped from 46% to 36% in the five years to 2019, according to a Wall Street Journal study. MBAs are now the more common qualification.

Nor is appointing qualified accountants to CFO roles the norm in Europe. In nine out of ten European countries surveyed for one study, the overwhelming majority of CFOs in major firms lacked accounting qualifications.

The exception is the UK, where 83% of FTSE 100 CFOs in 2019 were accountants. There is anecdotal evidence, however, that this is changing too. Given that new CFOs are typically in their 40s, Richard points out, new appointments with UK accountancy backgrounds are likely to have qualified under the old UK General Accepted Accountancy Practice standards, rather than the International Financial Reporting Standards now in common use.

Richard cited how large US company boards have appointed CFOs who have far broader and richer career paths including from divisional CEO roles, corporate finance, investor relations, and general counsels in addition to the trend for COOs to also have responsibility for finance functions. “These wider career journeys make for well-rounded CFOs who can think strategically, understand operational complexity as well deliver the numbers. CEOs today are seeking a partner in a CFO who does more than just the numbers.”

Storytelling skills

The shift from listed company to private equity is not a “massive leap”, Richard argues, given the depth of experience in governance and leverage offered in the former. The key is understanding the different focus, more in depth business knowledge and time horizons that a PE investor on a Board will have compared to a typical listed company non-executive director.

As for sector, he believes there are similarities between many verticals: “Coming from a subscription media business – where you’re looking at lifetime value, customer acquisition cost, price elasticity – I’m looking at exactly the same things in a tech business. It’s all the same themes in a recurring revenue business model.”

Besides not acknowledging situational experience, says Richard, company boards may be missing a trick if they fail to seek out candidates with the right leadership skills. This includes the ability to energise teams and build a narrative – especially important given the way that technology is currently transforming finance operations.

“By automating manual processes, my teams have been able to focus on higher-value work. We can make faster decisions about business operations with the confidence that our data is accurate,” he says.

“CFOs are frequently leading finance transformation programmes and need to invest the time to listen to the team, address their concerns, and explain the benefits of the changes to them as individuals. The ability to create a clear and engaging narrative is key to building trust which reassures employees and helps to secure their buy-in for digital transformation.”

If you would like to find out more about the sources or statistics used, or Leadership Dynamics, please get in touch.

Ruby Sheera

Managing Director, Technology and Technology-Enabled

[email protected]

Mark Tomley

Partner, CFO

[email protected]

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