With sharp rises to interest rates and market valuation corrections, the landscape in the world of Private Equity has changed significantly, but what does this mean for current and aspiring Private Equity CFOs? Drawing on findings from our recent CFO Pathways Report together with their extensive professional insights, Jason Shaw and Lizzy Caselton in Eton Bridge Partners’ Finance Practice consider how macro trends are influencing the Private Equity CFO space and what the future may bring.

CFO hiring has remained constant despite natural predictions of a slowdown

It’s no secret that Private Equity deal flow has slowed recently. According to Bloomberg data, global Private Equity investment fell for the fifth successive quarter in the first quarter of this year. The surge in post-pandemic deal activity has fizzled out against a backdrop of market corrections and challenging debt markets leading to a sharp increase in the cost of borrowing. The slowing deal flow left many wondering if Private Equity CFO hires would also be affected.

Despite the decline in deal activity, the volume of CFO mandates remains the same as previously seen. It would be wrong to assume that it’s business as normal though – the shift in Private Equity investment strategies has meant we are seeing a different set of hiring priorities. Post-Covid, Private Equity CFO hires were most commonly a result of new platform acquisitions and a subsequent change in management teams.

Investors have become increasingly inward-facing; the focus is on improving the performance of existing portfolio companies and although confidence is increasing there is still hesitancy in deploying dry powder. The performance of the portfolio is being more closely scrutinised along with their respective senior management teams; this means the CFO is very much in the spotlight.

With an increasing number of exit timelines being extended, the current team may no longer be the right fit for amended strategies from an investor perspective. Interim opportunities meanwhile have been created due to immediate changes required in management teams, whilst searches are being conducted to find longer-term solutions. At Eton Bridge Partners, we are noticing an increase in the number of interim opportunities available for our CFO network. With over 58% of our interim placements, this year, supporting PE organisations.

Risk aversion and a greater focus on cash flow mean PE firms are putting more emphasis on having the right CFOs in post

The compound effect of the pandemic and tougher economic conditions on business performance mean equity values may have been significantly impacted. Investors want more experienced candidates with strict covenants having to be met and therefore a greater emphasis on tight banking relationships, and a clear forward view needed on cashflow. This is backed up by data from our CFO Pathways Report which shows that the average age of a CFO globally is around 50, indicating that seasoned knowledge with greater business experience remains desirable.

On the search side, expectations of potential candidates have become much stricter. This means that stepping up from the role below CFO into a CFO role within Private Equity has become more challenging. Our CFO Pathways Report found that the move into a first-time CFO role is more likely to be an internal promotion at present; this correlates with our observation of increased risk aversion across Private Equity CFO appointments.

Whilst our CFO Pathways Report found that generally CFOs often hail from a Financial Controller background, in the Private Equity sphere, CFOs tend to have a greater commercial pedigree. This is because there is a greater expectation for the CFO to be more involved in the day-to-day operations and help organisations achieve its strategic objectives.

CFOs on the move in search for better wealth creation

More challenging business conditions and valuation corrections are also driving candidate behaviour. CFOs equity is worth less than originally thought and that is leading candidates to be more open to a move. Lengthening exit timeframes are also causing some frustration. According to Bain & Company’s 2023 Global Private Equity Report, Private Equity exits dropped to $565bn in 2022 from $969bn in 2021. Given the slower exit potential, CFOs’ heads can be turned by external opportunities with shorter exit timeframes, or an opportunity to earn more with the same tenure required.

With a general election looming in the UK and the possibility of a change of government, CFOs are also eyeing the potentially significant impact on salary expectations in Private Equity -backed organisations. If capital gains relief is abolished or reduced, then there is likely to be a greater demand for higher base salaries and attractive bonus schemes to offset the material decrease in the value of equity cheques.

The outlook: CFOs to remain in demand

Deal flow in the second half of this year is predicted to be greater in comparison to the first half; historically, this tends to drive an increase in both interim and permanent CFO mandates.  There is also a greater need in expertise for professionals who can support with  pre deal due diligence  and post-acquisition professionalisation.

Strong cash flow and cash management will continue to be the dominant skillset of a Private Equity CFO. There will also be a greater emphasis on the operational competence of a CFO to help with value creation strategies to bolster business performance. With interest rates unlikely to soften to anywhere near post pandemic rates in the medium term and subsequently leading to continual downward pressure on multiples, the importance of having a ‘strong’ CFO is more than ever.

Private Equity CFOs will need to continue to be commercial, and authentic, with the ability to lead, influence, and challenge appropriately. Commercial skills will remain paramount, yet data detail, accuracy, and trust from the investor are also of key importance.

If you would like to discuss your next move or would appreciate a conversation about sourcing talent, please get in touch. As one of Europe’s leading finance executive solutions businesses with deep sector expertise and a first-rate network, we would be delighted to hear from you.

Find out more about Private Equity portfolio solutions with Eton Bridge Partners