At Eton Bridge Partners, we are seeing an increasing number of private equity (PE) backed organisations hiring a Head of Tax and Group Treasurer.

Lorna Blair, Partner in our Tax & Treasury Practice, touched base with senior figures in her network to explore the reasons behind this trend and its implications for the industry. Lorna drew on the expertise of:

• Tim Homer – Head of Tax at Cobham, backed by Advent International.
• Emma Bairstow – Chief Accounting and Tax Officer at Convera, backed by Goldfinch Partners and The Baupost Group.
• Wilson Tegala – Group Treasurer with extensive PE experience, previously worked with Bain Capital.

Increasing complexity is driving PE-backed companies to hire Head of Tax and Group Treasurers? 

Having a senior tax person at the top table makes sense and can bring significant tax savings as well as managed risk, says Emma. The treasury function in PE-backed organisations has evolved far beyond transaction management. Treasury strategies have become increasingly complex and a more instrumental part of business strategy. The tax function has also become more involved. In the past, PE organisations were able to outsource most of the tax work for their portfolio companies with the CFO acting as the internal point of contact. But as tax and transfer pricing has become more complicated, this model has become too expensive and too broad for the CFO to manage.

Higher interest rates are also a factor. Managing debt has become a material issue for all companies and this poses an even greater challenge for PE-backed companies as they tend to take on higher debt and pursue more aggressive growth paths.

A Head of Tax and Group Treasurer brings multiple value-adds for PE-backed companies

The Group Treasurer is pivotal in driving financial stability, growth and value creation in PE-backed companies by effectively managing cash, debt, risk and relationships, says Tim. Wilson points out that value creation comes in many forms – financials, risk mitigation, improved services and enhanced governance. Many PE portfolio companies lack treasury experience and, in these cases, value creation can be dramatic through a centralised approach to cash management, the utilisation of bank account structures, hedging programmes and the management of interest rate and FX exposures. Emma agrees, adding “Interestingly we are seeing this at Convera in our sales funnel as PE groups look wider than banks for managing their Forex risks.”

For PE-backed companies on rapid growth tracks, getting the correct tax controls and governance in place, together with an effective transfer pricing strategy to reach optimal tax structure, will be a key area of value focus. But it’s not just about cutting costs and hitting financial targets, it’s also about wider corporate governance, reputation and responsibility around areas such as Environmental, Social and Governance (ESG). “There is far more emphasis now on ESG and deals can potentially fall through due to lack of controls and governance,” points out Wilson.

At the point of exit, a PE-backed company can benefit from a Group Treasurer to support due diligence, advise on what is relevant or sensitive and navigate financing agreements. A Group Treasurer will be alert to any potential negative debt impacts on the funds as a result of what’s likely to be a complex corporate and ownership structure. They will also have one eye on limiting risks that may arise from future vendor due diligence or the IPO prospectus. Unlike in a listed company, risks and exposures can lead to reduced exit value, so the Treasurer’s role in mitigating these is crucial. “If exit is via a sale, the price will be determined by an earnings multiple and therefore even small exposures have a much larger impact on price than you might imagine,” cautions Wilson. Emma further expands on this point “This is also true of irrecoverable VAT and GST (Goods and Services Tax) which impact EBITDA.”

No one treatment is right for every investor and the bottom line is that PE firms need to look at tax consequences earlier in the acquisition cycle to determine the best investment structure. The tax impact on the fund’s investor base must also be carefully weighed and tax modelling has become more prevalent at the outset of the deal.

When is the right time for a PE-backed company to hire a Head of Tax or Group Treasurer?

In a nutshell, the time to hire is as soon as the complexity of the issues mean that expertise is required beyond that which the CFO and third-party advisors can offer. The timing will of course depend upon the size of the portfolio company and its growth ambitions and global footprint. Tim says:

There is only so much an outside advisor can provide and a CFO will only have so much bandwidth to manage the complexities involved.

Tony sees no good reason to sit on your hands when it comes to hiring given the value and surety that getting the right people into these roles will bring; “Good tax or treasury people should pay for themselves many times over and failure in either of these areas can be terminal.”

Putting the tax and treasury roles together can make sense for a PE-backed company that may lack the size needed to attract and retain two separate senior professionals.

What skills are needed to lead tax and treasury in a PE-backed company?

Versatility, commercial awareness, being comfortable with change, M&A experience and the ability to manage stakeholders feature heavily here. Also, strategic and tactical understanding of the business and strong people skills to build and run a successful team and work with the rest of the business. Tony says:

It’s crucial for tax and treasury to be embedded across the organisation; Make tax and treasury part of the business, rather than a function that picks up the pieces afterwards or sits in an ivory tower.

There are undoubtedly transferable skills between tax and treasury in a PE-backed organisation as opposed to within a large, listed corporate. But there are also notable differences. For starters, a head of tax in a PE-backed company will have to be able to juggle more balls. “You can’t just stay in your own swim lane of corporate tax,” says Tim; pointing out that areas such as VAT and employment tax will also be in the remit. Being able to manage the tax implications of mergers, acquisitions and divestitures and advise on how best to structure deals to avoid VAT liabilities and maximise VAT recovery is also key.

Wilson points out that the PE environment tends to be more dynamic; “This translates into an expectation to deliver agreed solutions much faster.” Another difference is that within a PE-backed company, resources may be more limited so being able to exercise sound judgement and take the right decisions at pace is crucial. Emma says:

To thrive in PE, you have to be able to be comfortable with change and happy to start with a blank piece of paper rather than taking on something already formed

PE-backed companies can offer attractive career growth opportunities for tax and treasury professionals

PE-backed businesses are good at spotting talent and leveraging the value that the individual can bring across the portfolio group. “I think there is a greater opportunity to be more than a tax leader in a PE-backed organisation,” says Emma. So, could we see more tax and treasury professionals making the switch into private equity from large, listed companies? Emma says that in terms of remuneration, the two seem to be on a par and the less onerous financial reporting constraints in private equity can be a draw. If involved from the initial PE acquisition, there could also be the added benefit of equity which can be substantial if the investment is successful.

With private equity offering a rewarding and interesting seat at the top table, we could see more tax and treasury leaders making the move, particularly if the PE market picks up so that the management equity element of the package becomes more attractive. Wilson agrees that private equity can be a good prospect for tax and treasury leaders;

PE-backed organisations are undergoing huge transition which will always make this role prominent, challenging and rewarding in equal measure.

My thanks to Emma, Tim and Wilson for sharing their wide professional experience and insights with us. Given the substantial number of private equity firms and CFOs in portfolio companies investing in these specialised areas, it appears this trend is here to stay.

Whether you are a senior tax or treasury professional looking for new opportunities or you are looking to hire in your organisation in the UK or internationally, please do get in touch with Lorna to discuss further.