CFOs in PE-backed companies: A balancing act
In today’s fast-paced world, where change is the only constant, one of the functions that has been impacted significantly is finance. Constantly evolving government regulations, statutory requirements and the company’s goals around growth are making the role of the CFO exceedingly complex and dynamic. Equally, the role of the CFO is tailored to organization specifics: Stage of growth, nature of the industry the company operates in, internal and external stakeholders involved and the regulatory framework.
The CFO has become key in the Private Equity world, where funds are increasingly investing in high-growth companies and their first step along the way for those investments is to bring in a high-quality CFO.
Private Equity funds seek differentiated attributes in their portfolio company CFOs. These range from rigor around governance, processes and controls to being a co-pilot to the promoter in running the business. The CFO has to increasingly draw a balance between keeping the controls and governance, as well as delivering financial impact in various business scenarios. Hence, the most important lever is balancing execution with the growth agenda while adeptly building consensus among the various stakeholders of the business.
What has the journey been like? How do CFOs face this new challenge and work in this new environment? Russell Reynolds Associates brought together CFOs and PE funds in India to foster a discussion around the winning traits of CFOs for PE-backed portfolio companies.
The stated requirements of a good private equity CFO
Every PE portfolio company wants a CFO with a short learning curve and who can plunge in, take the reins and help the promoter maneuver and execute smoothly through challenging times. Increasingly, a CFO who can maintain an independent voice around controls, compliance and execution is becoming essential for PE portfolio companies. That said, contributing to strategy, spotting opportunities and planning ahead for seen and unseen challenges are becoming especially important attributes of a private equity CFO. The critical skills for today’s private equity CFO include:
Business partnering: A PE CFO needs to go beyond maintaining the books and become a strategic business partner to the promoter, and be the guardian of the company’s business and financial goals.
Value creation: Whether it is a listed or soon-to-be-listed company, having investor relations experience becomes an added advantage due to the focus on value creation for the investors (strategic and financial) and promoters.
Stakeholder management: The CFO needs to have the gravitas and the ability to manage multiple stakeholders—the promoter, strategic/financial investors, board of directors, public markets, analysts, rating agencies, etc. S/he needs to ensure that different stakeholders get the financial return they are looking for as well as visibility into the company’s future plans.
One of the biggest challenges CFOs face is balancing the goals of the promoter and the PE investor while ensuring that governance is not compromised. The vision of the promoter and the appetite of the PE investor can result in conflicting goals and it is the CFO who needs to steer the company through these rough waters. S/he needs to find the connections between two apparently discordant strategies and bring the players together to align around the goals they have in common. At the end of the day, this is critical because of the message it sends to the outside world—not only to the customers and external stakeholders, but also to other prospective investors who will be watching closely. Balancing these competing objectives is probably one of the most important jobs of the CFO today.
What are PE funds looking for in a CFO?
Private equity in India is as new and nuanced as the role of a CFO. Here, PE works slightly differently from the way it works in the Western world, where the investment is made for a shorter timeframe, the growth levers are more structured and capital is pulled out per milestone-based exit plans. India is a growth story. The investment happens with the intention of creating capacity. Hence, the way PE-backed companies look at CFOs also differs.
The CFO as the custodian of compliance and controls, in line with statutory requirements, must keep the books clean. In addition, PE funds also want CFOs who are intuitive—individuals who can look at the “big picture” and also foster day-to-day execution. That is, they must balance the growth agenda with execution. At the end of the day, execution excellence takes center stage.
Given that the CFO needs to provide financial impact within various scenarios, s/he is someone who must be able to help the promoter prioritize as well as drive execution, keeping all stakeholders’ interests in mind.
The PE CFO’s perspective
While the basic requirements of every PE CFO today have been discussed above, there are certain qualities that make some PE CFOs stand out from the rest. These constitute the “silver lining” and have proven to be qualities that PE CFOs are sure to benefit from. They include:
Being loyal to the company vision: The PE CFO needs to be loyal to the company and not to just one stakeholder—whether it is the promoter or the investor. While managing the financial goals of the company, the PE CFO needs to be the guardian of the vision that the promoter has envisaged for the company and ensure that it does not get derailed. There will always be disagreements regarding growth versus profitability, organic versus inorganic and capital expansion or maintaining the status quo, but the PE CFO needs to remember that partners will enter and exit—it is only by staying true to the vision of the company that returns will be sustainable.
Understanding the investment: In the case of PE-backed companies, the CFO first needs to understand the objective of the investment. Was the investment made with the intention of a speedy exit or of capacity building? Is the exit going to be through an IPO, strategic sale or another route? Asking questions such as these enables the PE CFO to effectively plan for the future. Often, there is a conflict between various stakeholders on this dimension. For example, the PE investor will work toward an exit, whereas the promoter is in it for the long run. The PE CFO is the one who evens out various goalposts on a single plane by objectively carving out the vision and helping the organization work toward achieving it milestone by milestone.
Being the link between stakeholders: A PE CFO needs to be discerning. S/he will be required to work with multiple stakeholders alongside the promoter. Hence, being a link by having healthy relationships with the PE investors (sometimes majority and minority), the board and even the chair of the Audit Committee is extremely critical, especially when differing opinions need to be presented to the promoter. In this manner, a PE CFO needs to be able to navigate among stakeholders and convert a conflict situation into one driven by healthy discussions.
Looking beyond the numbers: Business metrics are far more important than financial ones today. Being able to look beyond financial numbers is the key to growth. As a PE CFO, it is important to tailor a different strategy for a financial investor and for a strategic investor while ultimately linking them to broader company goals. Strategy and capital are no longer constraints for businesses. It is now important to bring execution excellence to the business in order to fuel growth as well as to build a healthy business.
Executing on the plan: While the promoter will have many new ideas, it is the PE CFO who has to investigate them further on the basis of clear metrics and then present his/her viewpoint in an objective manner so that the company plans are crafted realistically. Businesses with promoters who allow their CFOs to question their ideas and discuss solutions ultimately succeed.
How close are the “wants” vs. “reality” of who is getting hired—the executive search perspective
Most PE-backed companies today are hiring CFOs who are solid co-pilots for the business. These individuals are partners to the promoter in defining the business strategy from the perspective of developing forecasts and budgets and identifying growth levers, and once this is done they are proactively tracking performance and any slippages versus the plan and are influencing course corrections in execution. Given the prominence of execution, PE CFOs are actively engaging crossfunctionally to ensure the achievement of targets. This is the most prominent attribute of PE CFOs today.
While prior investor relations experience is a stated requirement, it is most challenging to find. Hence, in reality, most CFOs who are hired for PE-backed companies don’t necessarily check this box. That said, they have the personal attributes to manage different stakeholders well, balance a variety of requirements and build consensus in a systematic manner. This is the second-most-critical characteristic that we find with CFOs in PE-backed companies in India.
A PE CFO’s role is constantly changing, with nuances being added every day. While all the rigorous and exacting aspects of controllership, financial reporting and compliance are a given, PE CFOs in India are taking on a more strategic role today—driven by the growth stage of their business. And this means that they need to go beyond the numbers by getting involved in the execution and overall operational efficiency of the business.
At the end of the day, the PE CFO must remain loyal to the vision of the company. To remain competitive in the evolving business landscape, the CFO needs to work with the promoter to forge a relationship based on trust, collaboration and a shared view on how to move their company forward. Drawing from the strengths of the other investors, they need to define the commercial, strategic, operational and financial blueprints of the company and maximize its opportunities for the future.
Abhi Dhall - Standard Chartered PE
Bharat Kedia - Motilal Oswal PE
Varun Batra - Baring PE Partners
Varun Laul- Zodius
Chief Financial Officers
Abhishek Singh - Mastek
Anand Agarwal - Tata Power
Jitendra Jain - GMR Group
Kaleeswaran Arunachalam - Future Lifestyle Fashions
Mihir Modi - Zee Entertainment Enterprises
Mitesh Shah - Bookmyshow
Manish Vora - Johnson & Johnson
Ram CV - Impresario Entertainment
Sandeep Batra - Crompton Greaves
Tanmay Kumar - Burger King
Russell Reynolds Associates
VINITA KATARA is a member of the Firm’s Corporate Officers practice. She has successfully completed a number of CFO searches for PE backed portfolio companies in India. She is based in Mumbai.
CAROLINE RAGGETT is a member of Russell Reynolds Associates’ CEO & Board Services practice, serving clients in China and the West, and leads the firm’s Corporate Officers practice for the Asia Pacific region. She is based in Hong Kong.
SACHIN RAJAN is the Country Head for Russell Reynolds Associates in India. In addition, he leads the firm’s Healthcare and Consumer practices in India. He is based in Mumbai.
SANJAY KAPOOR leads the Industrial and Natural Resources practice and is a member of the firm’s CEO & Board Services practice. He is based in New Delhi.