Chief financial officers play an essential value-creation role in any sponsor-backed portfolio company. However, several forces are pushing CFOs to evolve at an increasing rate.
Before 2010, private equity-backed CFOs — CFO version 1.0 — were often a safe pair of hands who kept the trains running on time. Boards often required CFOs to have CPAs, early career audit experience was usually a must-have and most CFOs came up through the controllership path. In 2021, CFO version 1.0 is thought of as a super controller, an expert scorekeeper who quickly and accurately reports the trailing period’s results.
Over the last 10 years, we have observed the rise of CFO version 2.0. Between 2010 and 2020, PE sponsors and their CEOs began asking more from their CFOs across three main areas.
- Operational orientation
- Forward-looking analysis
- Next-level business partnership
Modern, sponsor-backed version 2.0 CFOs are expected to create value with a general management mindset. They lean in and proactively pull levers that support execution against the investment thesis. They also have strong FP&A skills to help sponsors and CEOs understand where a portfolio company is heading and help steer the ship on the optimal course. Communication skills have become paramount, as stakeholders expect a CFO to explain the numbers as a compelling narrative that highlights new opportunities.
CFO version 2.0 is now the baseline for PE sponsors, but that baseline is already shifting, despite the fact that less than half of all current sponsor-backed CFOs meet this standard. As we look forward, private equity demands on CFOs will increase. Record multiples will persist, competition will grow more fierce and value creation will be ever more reliant on operating muscle. Who will rise to the challenge and come out on top? Enter the CFO 3.0.
The PE-backed CFO 3.0 will exhibit three key, next-level strengths.
- The ability to utilize data in increasingly complex, yet actionable, ways
- A new, deeply commercial mindset
- A developed CXO (chief everything else officer) level of contribution
Version 3.0 CFOs will not only need to master data analytics and stay at the forefront of breakthroughs in computing and artificial intelligence, they will also be responsible for driving an analytical, data-driven orientation through the company. For example, one innovative CFO hired data Ph.D.s to the FP&A team who required financial training, but the move resulted in stronger modeling and pattern recognition muscle.
The next generation of sponsor-backed CFOs will be experts at pricing strategy and salesforce compensation. They will be conversant in every aspect of a company’s go-to-market strategy, and they will be commercially skilled contributors whose job is to help the chief revenue officer find incremental growth. Version 3.0 CFOs will grow a platform company’s top line, rather than be a passive commercial bystander.
Finally, these leaders will find more ways to strengthen a business’s operating muscle as a CXO with a finance skill set. Version 3.0 CFOs have been promoted to CFO/COO thanks to their skills in this area.
We estimate that less than 1 percent of sponsor-backed CFOs meet this standard today. The sponsor-backed CFO profession must further strengthen its collective capabilities and become even more essential to value creation in the private equity-backed middle market.
Rob Huxtable is a Partner at FALCON
