Three Types of CFOs for Growing in Turbulent Times

At one time the Chief Financial Officer had three main responsibilities:  

• keep accurate books,  
• generate financial reports, and  
• handle all compliance issues that attorneys didn’t. 

Those days are long gone. Today a CFO is central to strategy and execution on the value creation plan for a private equity backed portfolio company. The CFO plays a critical role in shaping the path to the private equity backer’s investment thesis by driving growth while maintaining sound financial stewardship.   

We’ve previously written about how important the CEO is in empowering a portfolio company to achieve the investment thesis of its private equity backers. But the CFO’s role in value creation is on a par with the CEOs in many companies. In fact, we see the most effective CFOs acting as a collaborative partner to the CEO. These CFOs help their CEOs to “see around corners” and make critical decisions armed with timely and accurate financial data. 

As Fortune writer Alan Murray noted in a recent CEO Daily newsletter: “The job of CFOs has changed dramatically in recent years. As the keepers of metrics, they’ve had to adjust to both an explosion in data and data analytics, and also to a proliferation of goals measuring environmental and social as well as financial outcomes.” 

He goes on to note that the battle for qualified CFOs will continue even if economic conditions slow. 

In our experience with recruiting high-impact CFOs for private equity backed software companies, we have seen certain CFO skillsets and mindsets that are especially valuable for navigating turbulent times. 

Inflation is at its highest in 40 years, the threat of recession looms large, markets have seen major disruptions due to the pandemic and supply chain woes, there’s war and uncertainty in Europe, and demand in many markets has softened. 

A successful CFO will have to navigate these uncertainties while staying focused on the investment thesis, profit, and the private equity firm’s ultimate goals for the portfolio company. 

This is one of the reasons that qualified CFOs have been in high demand and also are commanding premium salaries, as we outlined in the inaugural edition of the Private Equity Talent Benchmark Report. The report provides insights into the talent market for private equity portfolio companies, including compensation trends, executive turnover and upleveling trends and much more. Complimentary copies can be requested at: www.bespokepartners.com/private-equity-talent-report/ 

We have worked with hundreds of CFOs in the private equity space and have identified three general skillsets that can bring major benefits to a portfolio company riding out turbulent times:

The Growth Expert

Sales and marketing often is a “black box” to CEOs and CFOs, according to growth consultancy SBI. Exactly what the investment in sales and

 marketing is producing is a mystery to many of these CFOs.

That’s not the case with the growth-oriented CFOs, who typically have strong track records in growth stage firms. These finance leaders often have great experience with investing in sales and marketing plans oriented around high growth. They do not shy away from rigorous analysis of marketing and sales metrics to ensure the investment is indeed achieving the target ROI. 

The “Growth Expert” CFO is in great demand in the private equity sector because they understand finance’s role in fueling value creation plans. Further, these CFOs often understand the need for “smart growth” that will maximize EBITDA, which in turn can fuel more growth.  

Unlike the grow-at-all-costs, “landgrab” mindset that drives some corporate strategies, a strong market-oriented CFO will shape the marketing and sales investments to maximize profitable growth, considering factors like lifetime customer value and customer acquisition costs.  

We advise clients to look for CFOs who are versed in marketing and sales models, enjoy partnering with their Go-to-Market counterparts, and who can hold the sales and marketing organization accountable for results.  

The CFO can play a critical role in scaling up the business and enabling business models that take advantage of repeatable, long-term relationships with customers. These are essential strategic goals of SaaS and software companies today. 

The Optimization Expert

During an economic downturn, many finance executives take the approach of cutting as much as possible everywhere possible, to conserve resources and ride out the storm. But the CFO leaders who excel in turbulent times don't simply cut costs. They keep the organization lean while making resources available to take advantage of market opportunities, such as investing in marketing and sales to scoop up market share when a competitor falters.  

This type of CFO is also typically an expert in capital structure. Top skills for these types of CFOs are managing cash, debt, and debtholder relationships. They often plan for downturns long before they happen, securing access to credit lines and other resources to maintain liquidity and cashflow. A downturn and slowing customer spending can disrupt cashflow, affecting resources for operations. At the same time, debt servicing can become a challenge and open the company to risk. Capital structure experts avoid such issues by knowing how to optimize resources and debt, considering the cost of capital and avoiding the cash crunch that sometimes takes companies by surprise when markets tighten. 

In our experience the CFOs who end up being replaced in mid-stream of a private equity hold period are those who fail to monitor and proactively plan to maintain cashflow and liquidity. 

The Add-On Expert

A third type of CFO is the expert at integrating add-on acquisitions. Market downturns are prime times to buy up competitors and acquire add-ons at bargain prices. This type of CFO thrives at analyzing the synergies and economies that can be achieved by integrating acquisitions and positioning the merged company for even greater growth. 

According to McKinsey, integration is a task the CFO should not delegate. In fact, companies are more likely successful when the CFO is directly involved in identifying potential synergies, transformation and value-creation opportunities, as well pointing out cultural pitfalls. 

Forty-nine percent of more than 200 CFOs polled said the CFO had designed the company’s transformation road map, McKinsey reported, and 47 percent said the CFO took the lead in developing the capabilities required to support integration. 

As you might expect, this type of CFO is a key player in achieving an investment thesis that is based on the potential for rolling up multiple companies in a sector. A market downturn creates a window of opportunity to execute on such plans when valuations soften, and the “Add-On Expert” CFO recognizes the opportunity and sets the plans in motion. 

Finding the Balance 

We’ve sketched out the three general types of CFOs we have seen be successful in private equity portfolio companies. But of course, no one is only one of these types of CFO. Like in every discipline, real-life CFOs are a mix of these skills in differing proportions.  

The key is to identify which skillsets will be essential to achieving the investment thesis and then assess your CFO candidates based on that scorecard. We’ve helped private equity portfolio companies evaluate hundreds of CFO candidates using advanced scorecarding that aligns candidate evaluation with the value creation plan.  

It's also important to consider cultural fit and interpersonal skills, the “soft skills” that are vital to leadership and motivating staff to succeed. 

In addition to advanced scorecarding, our search process brings management science and behavioral analysis to measure the leadership capacity of your CFO candidates. These executive-recruiting components enable us to identify the CFOs with strong, proven experience and those who will excel. This is why our process has yielded a 99% success rate, placing candidates who have stayed in their leadership roles for at least two years.