Private Equity backed businesses have become desirable to senior executives over the past few years as it offers individuals the opportunity to work closely with financial sponsors to determine the business’ strategy and provides a high degree of autonomy to make decisions to drive the performance of the business within agreed plans.
Typically, PE backed business’ have a sense of urgency to achieve results, a lack of bureaucracy around decision-making and can offer executives very attractive financial rewards.
Eton Bridge Partners recently published CFO Pathways, our analysis of research into the appointments of CFOs in 2019 and 2020 in the UK. This report concluded that only 27% of CFOs transitioned into PE from other ownership structures (listed, private). It’s reasonable therefore to say that to obtain a role in PE, you need to have moved from one financial sponsor to another. Interestingly we also found, it appears far more common to transition from PE to Plc (in percentage terms).
Marcus Shah, Partner within our CFO and Finance Practice who specialises in Private Equity appointments, interviews experienced Chief Financial Officer, Patrick Sinclair, who recently transitioned into his first PE CFO role having been a listed CFO for the past 5 years about his journey:
Marcus Shah: Patrick, given you are part of that 27% of CFOs who have transitioned from Plc to PE, what was it that made you decide to make this move?
Patrick Sinclair: From my perspective, I was focussing on looking for a role that really involved working in the business as a more operational CFO. As a CFO of a Plc you encompass many of the aspects demanded of a PE CFO, but with less external reporting you are able to spend even more time in the business adding value.
MS: Private Equity is commonly observed as a data hungry environment with less of an emphasis on governance. How did you find the transition and shift in focus and demands from Plc to PE?
PS: I think that a very high percentage of the skill set required is the same across PE backed business and Plcs, therefore, it’s just about learning a little at either end. I don’t think it’s right to put all Plcs in one bucket and all PE backed businesses in another – it often depends on the type of business. I had experience working in Plcs with similar characteristics to PE backed businesses such as leverage, so had that box ticked with reasonable levels of knowledge and sight of where the business was in terms of covenant compliance, higher focus on cash etc. People often quote that as a big difference when going into a PE backed arena.
“For me, clearly managing one, or possibly a combination of PE houses, versus multiple investors is a totally different dynamic.”
The PE houses have very different rules of engagement in terms of how they interact with you and their portfolio companies. Quite often those engagements will be driven by performance as well as the individuals and PE house style, but there’s no doubt that in the Plc world you are required to spend a lot of time looking back around results, and then managing the external message – that’s part of the CFO’s role.
MS: Do you think it helped because you had prior PE experience – albeit not in a Number 1 role?
PS: Yes – I was initially in a Head of Financial Planning role and moved on to Regional FD while working for three different CFOs in the same PE backed business, and I was there for less than three years! So, that was a challenging situation, but certainly one in which I personally learnt a lot about how PE backed businesses are run and the interaction between the PE house, the lenders and management team. It was certainly very interesting, and I’d like to think it helped.
MS: When interviewing for PE CFO roles, was there a focus on prior PE experience or was it more about core finance competence? We typically find PE experience is a pre-requisite when hiring for a mid-cap portfolio company.
PS: I’m sure it was in the back of some people’s mind that I hadn’t held a number one role in a PE backed business when going through various interview processes. However, if everyone is only ever recruiting those who have previously been a PE CFO, then at some point the talent pool will dry up.
“The fact that I had sold a business as a CFO and I’d worked in two businesses that were reasonably leveraged, so if you combine those two things from a PE CFO requirement versus Plc, then that’s probably two quite big ticks.”
I think another key factor is the experience of the rest of the management team and the PE house. My now CEO (who recruited me) was previously CFO of this business and had prior experience of multiple PE backed businesses which I’m sure was a factor.
In reality, the chemistry and your wider experience plays a big part in what makes the leadership team choose the right candidate for a CFO role. People at this level should be able to learn the intricacies of a new sector quite quickly, which means they can form a relationship with a PE house or the lender, and then it comes down to management chemistry.
MS: It’s interesting you touch on sector. In our report, 69.5% of CFO moves were from different company sectors, which I personally found refreshing.
PS: Yes, it is quite refreshing. Personally, it doesn’t surprise me, and I’m sure there are some sectors where they would want specific sector experience – in financial services for example – but I don’t think that it’s necessarily required. It’s probably slightly driven by the candidates as well because they want to broaden their own experience. PE firms recognise the importance of casting the net more widely to ensure they are attracting diverse experience and new ways of thinking to drive value creation.
MS: What advice would you give to somebody who wants to move from a listed or privately owned business into their first number 1 PE CFO role?
PS: Well, I think there’s probably a couple of things to consider. You’ve got to be quite clear as to why you want to make that move and that you’re not just doing it because its Private Equity; you’ve got to have established your rationale for the move.
CFOs are very broad in terms of the range of experience and the skill set required for the role, so you need to demonstrate this; whether it’s getting involved in M&A, an exit or some re-financing as well as driving value. For example, if you don’t get the chance to lead a re-financing yourself, at least work closely with the bank(s) to gain that knowledge.
“Also, don’t think the areas that are clearly important in the Plc world are any less important in Private Equity, so whether it’s corporate governance or wider ESG, these areas are just as hot topics in the PE world.”
All PE backed businesses go through an investment cycle, and at some stage they need to attract new investors – investors are not just focussed on the financials, there’s a wider line of sight. Fundamentally, it’s all about value creation.
MS: That’s true. We’ve certainly been having more conversations with PE about ESG.
PS: Yes, the ‘E’ and ‘S’ strategies are clearly hot topics at the moment we also have a lot of conversations in our business not just around value creation, but value protection, and governance is about value creation through value protection.
MS: I couldn’t agree more with you. It’s no surprise that in a recent PwC report, 1 in 3 funds have hired Sustainability Officers. This just shows that ESG isn’t just a box ticking exercise but a real value driver.
Patrick, thank you very much for your time and input today.
If you’re looking for your next CFO role in Private Equity, or looking for a CFO to join your fund or portfolio, please get in touch: [email protected]
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