Ownership Issues

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As Seen in CFO Studio Magazine Q3 2016 Issue

A PRIVATE-EQUITY-CONTROLLED CFO JOB IS NOT AN EASY POST, BUT IT CAN PAY OFF

In general, being a CFO is a lot harder than it used to be,” says Howard Reba, Finance Director – Portfolio Operations at Marlin Operations Group, Inc., an exclusive consulting firm affiliated with Marlin Management Company, LLC, based in Hermosa Beach, CA. “CFOs today have their hands in so many things that used to be relegated to other people, and over time, the job has become much more complicated.” And this holds especially true, he points out, for the CFO of a company that is owned by a private equity firm.

Mr. Reba spoke on The Private Equity CFO —Challenges and Opportunities, at a Small Market and Emerging Growth Companies CFO Dinner, part of CFO Studio’s Executive Dinner Series, held recently at Roots Steakhouse in Morristown, NJ.

He began the discussion by asking the attendees what they felt were some of the different challenges the CFO at a private-equity-backed company faces. By an overwhelming margin, the response was the “virtually insatiable demand for information and insight” from the private equity group (PEG), he reports.

Attendees questioned what PEGs do with that high volume of facts and figures, and were surprised by the simplicity of his answer: “PEGs use the information they receive from their portfolio company CFOs to make decisions and pull different levers, much the same as any company does.” The group seemed to be hoping for a more complex explanation, so Mr. Reba added, “[A PEG] can only pull the same levers any company can, though it does bring additional resources, experience, and insight to help evaluate alternatives and make decisions.” As a matter of fact, Mr. Reba shared that he insists the reporting to the PEG and to the management team be aligned because they should both be interested in the same things.

Short Time Horizon

Another difference discussed related to how strategic planning is particularly tricky in the private equity environment where CFOs deal with a shorter or more defined time horizon. “[PEGs] typically target selling their portfolio companies after four or five years, which greatly impacts decisions involving investments, especially in infrastructure matters,” said Mr. Reba.

The challenge of having “two bosses” was discussed, as private-equity-backed CFOs are usually accountable to both the CEO of the portfolio company and the Board, which is typically controlled by the PEG. Mr. Reba advised CFOs in this spot to be “always conscious of the potentially competing priorities of the CEO and the Board.” While many companies have matrixed organizational structures today, CEOs in the small-cap private equity space are often the original company founders, who are very entrepreneurially oriented, and unaccustomed to not having total control of the company. The CFO often finds him- or herself addressing the CEO’s emotional adjustment.

Finally, the group brought up the topic of job security. “I was surprised it took so long to get to this,” remarked Mr. Reba, as the CFO is usually in the most tenuous role, particularly at a private-equity-backed company where management and other changes occur every four or five years. He explained, “Whenever an ownership change occurs, there is a chance of a change in management, and often it is a new CEO or a new PEG who wants to have their person in the CFO role. But that is no longer as automatic as in the past. “I am thrilled when a decision is made to keep a strong management team in place,” said Mr. Reba.

Still, for many, the risk of having to look for a new job after only four or five years is outweighed by the reward that comes with a successful exit for the PEG. “Usually the CFO has been incentivized with a piece of equity and can realize a nice payday,” said Mr. Reba. The cash compensation/equity ownership tradeoff with accompanying risks and rewards is more commonly seen in the private equity space than in other arenas.

Furthermore, Mr. Reba added, “If you did a good job, if you were successful and increased value, an active private equity firm may likely have another opportunity for you.”

Mr. Reba noted that over the course of his career he has worked in private, public, and private-equitybacked organizations and particularly enjoys working in the small and middle markets when a PEG is involved. “In addition to the financial leader sitting in a prime position to create value for the company, the ability to leverage the financial and operational capabilities of a strong PEG makes coming to work every day a fun assignment for the CFO.”

Rules for Success

As the discussion wound down, Mr. Reba took a moment to share his rules for being successful as a CFO at a company that is owned by a PEG. “First and foremost,” he said, “transparency.” He continued, “If there is bad news, inform the PEG immediately. It won’t get better with time, and nobody likes surprises.”

Second, Mr. Reba said, “keep an eye on the amount of cash and watch bank covenants.” Finally, Mr. Reba encouraged CFOs at companies with private equity owners to be on top of their numbers. “Be aware of how you are tracking against the plan and the trends in key performance indicators. Are you where you’re supposed to be?” He pointed out that getting back on track can take time, so measure constantly and adjust quickly; don’t wait.

In closing, Mr. Reba reiterated, “While the challenges and risks of the private equity CFO job are great, the rewards and opportunities can be far greater. “The CFO of a small company is often an island unto him- or herself, whereas the CFO of a company that is backed by the right PEG has much greater resources at his or her fingertips.” And that, he said, is indeed a bonus.

Copyright 2017