Private Equity

But Have They Ever Worked in PE Before?

 



The old CFO hiring playbook is holding you back

The critical role of the chief financial officer (CFO) in a PE-backed business is well-documented. As the financial steward, data custodian and primary liaison with the sponsors, there is very little margin for error. Despite this outsized importance and the frequency with which PE investors hire CFOs across their portfolios, there remains significant uncertainty around which characteristics and
core competencies to look for in candidates. As a result, sponsors tend to value a safe pair of hands, recycling the same candidates instead of searching for creative solutions.

To better understand CFO hiring trends across the European PE landscape, Russell Reynolds Associates mapped the CFOs of almost 3,000 portfolio companies across all sectors and countries. We analysed a representative subset of 150 of these companies, using sponsors’ fund sizes as a proxy for company scale.

Turnover is rapid. Only the fittest survive.

There is a war for established CFO talent; prior exposure to private equity environments is becoming increasingly sought-after, and this will likely reduce the talent pool.

Diversity is at the forefront of the hiring agenda, and although progress has been made over the years, there is plenty more to do.

1. Why are you ignoring internal talent?

It is a well-known fact that the CFO is the most frequently upgraded function following a buyout, with sixty percent of companies in our dataset having replaced their CFO post-acquisition. Where a new CFO was hired, the successful candidate was overwhelmingly likely to be externally hired, with promotion prospects for internal candidates slim at just seven percent. Promoting the number two to the CFO role can lead to a quicker transition and smoother onboarding if the bench is strong enough. Identifying and nurturing high-potential internal talent should be at the front of your mind from day one.
WHEN ARE CFOS REPLACED?
Pre-Deal 40%
Post-Deal 60%

Of this 60%

WHERE ARE CFOS HIRED FROM?
Internal Promotions 7%
External Hires 93%

2. Why aren’t your CFOs more diverse?

On average, 14 percent of portfolio company CFOs are female, slightly trailing both the FTSE 350 and the Euro Stoxx 50, each at 17 percent. There is significant variation across fund sizes, with smaller funds having made greater strides towards more female representation.
FEMALE CFOs BY FUND SIZE
Fund Size Percentage
€1-4.99bn 18%
€5-9.99bn 16%
€10bn+ 8%
Public Percentage 17%
PE Average 14%
FEMALE CFOs BY HIRING DATE
Hiring Date Percentage
Pre-2018 9%
Post-2018 19%
PE Average 14%

PE funds have made a clear push towards hiring more gender diverse executives into their portfolio companies since 2018, but the numbers still fall well short of where they should be. Ethnic diversity is likewise lacking. Given the high scrutiny on public companies driven by initiatives like the Parker Review and Change the Race Ratio, there will be intense competition for ethnically diverse talent. With no similar oversight of PE, how will investors step up to the challenge of diversifying their senior leadership teams?

3. What trade-offs are you willing to make?

PE investors love to hire CFOs who have already done the job, thereby limiting their talent pool and denying their portfolio companies innovative next-generation talent.

While businesses owned by funds in the €1-4.99bn range are 14 percentage points more likely to hire a step-up CFO than larger portfolio companies, two-thirds of current CFOs have served as a CFO before. Integrating psychometric assessments and leadership coaching into the hiring process can mitigate the risk of hiring an unproven candidate. Psychometrics also allow for a wider net to be cast, leading to a more diverse talent pool.

Given the relative dearth of female CFO talent, it is interesting to note that almost 50 percent of female CFOs were step-up candidates compared to just 30 percent of male candidates. Similarly, female CFOs were 20 percentage points more likely than male CFOs to be hired from outside of sector, highlighting the trade-offs that investors will make to bring in more diverse talent.
STEP UP EXPERIENCE BY FUND SIZE
Fund Size Experience
€1-4.99bn 42%
€5-9.99bn 28%
€10bn+ 28%
Average 33%
STEP UP EXPERIENCE BY GENDER
Gender Experience
Female 48%
Male 30%
Average 33%
SECTOR EXPERIENCE BY FUND SIZE
Fund Size Same Sector Different Sector
€1-4.99bn 38% 62%
€5-9.99bn 40% 60%
€10bn+ 46% 54%
SECTOR EXPERIENCE BY GENDER
Gender Same Sector Different Sector
Female 24% 76%
Male 44% 56%

4. Is experience really better than potential?

“But have they ever worked in PE before?” is the most common question when screening CFO candidates. PE is one of the most challenging environments in which a CFO can operate, and proven comfort with high leverage, frequent reporting, and working capital pressures is seen as crucial.

Contrary to conventional wisdom, most portfolio company CFOs have never held a PE-backed CFO role before, and this is especially true for portfolio companies of funds in the €1-4.99bn range.

Similarly, the CFOs of smaller portfolio companies are 14 percentage points less likely to have led a business through an exit than those at the helm of large-cap portfolio companies.

The PE market was extremely buoyant between 2018 and 2020 but funds have recently fallen back on old habits, increasingly hiring based on experience rather than potential.
PRIOR PE CFO EXPERIENCE
Fund Size Percentage
€1-4.99bn 30%
€5-9.99bn 44%
€10bn+ 52%
Average 42%
PRIOR PE EXIT EXPERIENCE
Fund Size Percentage
€1-4.99bn 22%
€5-9.99bn 32%
€10bn+ 36%
Average 30%
PRIOR PE EXPERIENCE BY JOINING DATE
Joining Date Percentage
Pre-2018 29%
Post-2018 54%
Average 42%
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But Have They Ever Worked in PE Before?