Within a Private Equity asset, The CFO plays a pivotal and multifaceted role in driving growth and achieving the milestones in the value creation plan. The changes in the CFO role and transition from traditional finance leader to strategic partner, instigator, and value driver are well documented. However, the value a CFO can create during a holding period is underpinned by the strength and makeup of the finance team.
Due to the demands and complexities faced by a finance function within a Private Equity asset, it is vital to have functional specialists who can execute their respective roles to an optimal standard. This article will explore whether, on top of a strong functional skillset, it is more beneficial to have a domain or situational experience and if, indeed, that applies to specific roles within the function. It will also discuss how embracing the data capability as a core finance asset is becoming increasingly valuable within a Private Equity context.
Situational v domain experience at C-1 level within a portfolio finance team
The 2023 LCap Leadership Capital Report, which analysed 246 Private Equity exits across the 2022/23 period, found an increasing appetite among upper-quartile businesses to find C-suite leaders with situational expertise and knowledge of the value creation journey over those with specific industry experience. Clearly, it is an interesting trend, but just how does that translate to leadership structuring beneath a CFO within the finance function?
We are often asked about the importance of Private Equity experience in C-1/2 finance roles within a portfolio organisation. Whilst it is still a point of contention for many, and each firm will have different views, the highest-performing assets realise that they need a mix of both.
Domain-specific experience can be highly important in its own right, especially if the portfolio company operates in a complex or specialised industry. It provides a deep understanding of the sector's unique challenges, trends, and dynamics.
We can see examples of when industry grounding is particularly relevant in more outward-facing analytical roles such as FP&A, where there is a demand for analysis on market conditions, scenario planning, cost benchmarking and industry-specific metrics.
Having in-depth knowledge or prior exposure to the specific industry allows for more nuanced analysis and benchmarking and is a bonus when making more informed strategic decisions.
This can also be true on the opposite end of the spectrum regarding Group Accounting and Controllership roles, focused on regulatory compliance and corporate governance. Certain industries, such as healthcare or Insurance, have complex regulatory environments and naturally differ geographically. Of course, there are always accessible regulatory guidelines that provide a framework for navigation. However, finance professionals with prior industry exposure in these instances will better understand potential regulatory pitfalls and how to identify and correct the course quickly.
Naturally, Private Equity situational experience is always highly valuable, especially when hiring a CFO, as funds seek an extra layer of comfort and credibility when appointing one of the key value drivers of their asset. However, is exposure to the value creation journey necessarily a prerequisite at the C-1 and 2 level?
Typically, we find that PE exposure peaks from the top down within a classic finance function. It makes sense to have the most prevalent private equity exposure among the most senior finance leaders due to the proximity to investors and ability to drive the required standards within the rigour and pace of MI, analysis and reporting, for example.
Clearly, there are highly relevant positions within the function, such as M&A specialists and deal execution roles, where it can be innately beneficial to have Private equity exposure. These professionals must understand the nuances of structuring deals, assessing investment theses, and conducting due diligence specific to PE transactions.
In many cases, a combination of both industry-specific and situational experience is the most advantageous. Finance professionals who have worked in the same domain as the portfolio company may have insights into market dynamics and growth opportunities. When they possess private equity situational experience, they can apply that industry knowledge to PE investment strategies, market entry, deal execution, and value creation.
Ultimately, the specific importance of each type of experience may vary based on the specific role within the finance function and the strategic objectives of the PE asset. However, finance professionals who can bridge both areas of expertise—industry knowledge and private equity situational expertise—often become invaluable assets to the finance team and the overall success of the PE investment.
At Altus Partners, our data-driven approach, underpinned by Leadership Dynamics and PACE, allows us to assess the balance of domain and situational experience within the finance function and the wider complementarity of the team. Chartered against data from upper-quartile management teams, we are able to ensure optimal structuring within an asset, allowing the finance function to deliver maximum impact.
Utilising the data function as a core finance asset
In many Private Equity assets, it is common for data capabilities to be closely aligned with the finance team or even report directly to the finance function. Whether data capabilities should be integrated into the finance team often depends on various factors, including the organisation's size, structure, and strategic goals.
We’ve seen an increasing appetite from portfolio CFOS and Private Equity firms alike to incorporate an asset's data capability into the finance function's remit. This has been evidenced within multiple assets, with the creation of a hybrid Financial Planning & Insights (FP&I) vertical becoming more popular – a step away from one reflective analysis and to data-driven actionable insight.
There are multiple pros of Integrating Data Capabilities into the Finance Team:
Alignment with Financial Strategy: Placing data capabilities within the finance team ensures a direct alignment with the financial strategy of the PE asset. A transparent and streamlined data suite allows Investors to easily view, digest and quantify information, making for better-aligned discussions with the CFO. It also fosters a culture of data-driven decision-making.
Streamlined Reporting: When data capabilities are within the finance function, there is often greater efficiency in generating and disseminating financial reports. Data can be seamlessly incorporated into financial reporting processes and underpin the business's automation.
Cross-Functional Collaboration: Data capabilities within the finance team facilitate collaboration with other departments, such as M&A, Operations and Strategy departments. This can lead to more effective cross-functional communication and strategy execution.
Throughout this piece, we've explored the ongoing debate surrounding the importance of Private Equity experience versus industry-specific knowledge within finance leadership roles. The verdict? At C-1/2 level, It's not a matter of choosing one over the other; the highest-performing assets recognise the value in a blend of both experiences. Industry-specific insight is invaluable for understanding complex sectors and regulatory nuances, while Private Equity situational expertise is crucial for strategic decision-making within the unique PE context.
Additionally, we've spotlighted the integration of data capabilities into the finance function, a trend gaining momentum in Private Equity. Placing data at the core of finance operations aligns with the asset's financial strategy, streamlines reporting processes, and fosters cross-functional collaboration, all crucial elements in today's data-driven decision-making landscape.
By leveraging a combination of industry knowledge and PE situational expertise, finance professionals can rise to become indispensable partners in driving success throughout the investment cycle.
When the finance function is optimised and strategically aligned, CFOs can unlock their full potential as value drivers, instigators of positive change, and strategic partners within the Private Equity arena.