4. Unlocking the value of cross-portfolio collaboration
Through discussions with clients, EY teams have found that many funds are not fully connecting the dots between their portfolio companies. For instance, funds often do not share insights and opportunities across their portfolio companies, even if they operate within the same sector. This is a significant value creation opportunity that often gets overlooked, largely due to organization structure and because siloed teams limit their focus to direct responsibilities. With one foot in operations and the other in strategy, plus a seat at the top table, the private equity CFOs are ideally placed to bridge that gap.
However, teams will need to be properly incentivized and challenged to collaborate and reach out across the fund structure. Technology can play a critical role; while certain operations and data collection activities can be shared or centralized as part of the back office, having critical insights and opportunities effectively communicated across teams requires a focused effort. Again, CFOs can lead the way.
5. Preparing for departure and maximizing exit valuation
The CFO plays an essential role in identifying and formulating exit strategy scenarios. While the initial investment may have been made with a certain holding period and exit strategy in mind, the CFO must be constantly attuned to changing economic conditions and opportunities for securing a successful exit and maximizing ROI. Additionally, some scenarios may require additional infrastructure. A public offering, for instance, requires the buildup of processes and procedures, including investor relations and external reporting.
In preparation for an exit, the firm’s story and numbers need to be aligned with the targeted exit option. Finance teams also need to set a balance between stretch and realistic financials. Six to nine months before a target exit, CFOs should already have a deal team mobilized, working in full force with a watertight story and supporting data, including preparation for diligence.
Environmental, social and governance (ESG) reporting is another consideration for maximizing ROI on exit. Having the proper reporting of metrics in place and providing the expected level of transparency can help support a premium valuation. While ESG may not be considered as the number one priority for CFOs, it is a topic that has gained traction and is increasingly looked for across the private equity landscape in making investment decisions.
Private equity CFO reimagined
The role of the PE CFO has changed dramatically in the past decade and is constantly evolving. Above all, CFOs are highly valued for the impactful guidance they can provide. However, depending on the company’s size, they are also valued for their ability to assess strategic transaction opportunities, assist in fundraising processes, run stress test scenarios, and oversee the implementation of new technology.
CFOs have become pivotal in steering a private equity company toward successful outcomes. The scope of their challenges and responsibilities may now be much more diverse, but the ability to unearth and deliver on new value creation opportunities is the common thread running through those activities and making successful private equity CFOs stand out.