Private Equity CFO Shortage: What's the solution?

In my previous blog, I discussed how the current deal slowdown has driven a shortage of proven CFOs with private equity experience to take on new roles. And while boosting salary and equity offers is one potential solution, it surely can’t be the only one.
Mark Tomley

November 27th, 2023

Private Equity CFO Shortage: What's the solution?


In my previous blog, I discussed how the current deal slowdown has driven a shortage of proven CFOs with private equity experience to take on new roles. And while boosting salary and equity offers is one potential solution, it surely can’t be the only one. For those investors and management teams looking to hire, there is, in my view, another answer. By relaxing certain criteria and being open to looking outside the usual private equity mould, investors can not only speed up their search but also, more importantly, add greater value to their organisation. I have no doubt that this approach will yield better results.

When hiring for a CFO, investors almost always specify a need for private equity CFO experience, seeing this as the best way to mitigate risk in a crucial hire. This is particularly true now when situational experience is at a premium to navigate a rocky economic climate. But, with prior PE experience hard to come by in the current market, investors need to challenge their perception that the safest bet is a leader who has ‘been there and done that’ in private equity.

In fact, considering candidates from outside the usual mould - for example, a ‘deputy CFO’ within a PE-backed business, or a proven CFO in a non-PE-backed role - can not only ease the current talent shortage but also bring a huge amount of value over and above a tried and tested PE leader. These candidates frequently approach their first PE CFO role with an even greater level of hunger, desire, and motivation to prove themselves, plus they often introduce greater cognitive diversity around the boardroom table, which research shows leads to less groupthink, better decision-making and can enable firms to better respond to their stakeholders.

What to look for

Having said that, not every non-PE or ‘deputy CFO’ candidate is cut out or ready to take on a private equity-backed CFO position. So, what should investors and management teams look for?

Where a candidate has previously held a ‘second in command’ role in a PE-backed business, we would look for somebody who has done this in a larger operation, where they have had a lot of exposure to investors, shareholders and banks, and the opportunity to take a leading role in M&A and exit. This ensures that they feel comfortable with and are trusted to step up to the CFO position, particularly in a smaller business. In many cases, we clearly see that the ‘second in command’ is running the finance team, while the CFO is more focused on strategy.

In the case of candidates that come from outside of private equity, while corporate experience is often ill-suited to a fast-paced, dynamic private equity-backed environment, there are exceptions, where you can find highly transferable competencies. For example, those coming from a business that has been through rapid change or navigated a high-stakes turnaround within a defined period can make the transition extremely well. Successful CFO candidates also frequently come from roles where they have been involved in M&A within a corporate environment, involving a similar fast-paced, high-stakes culture.

“We’ve had some great ex-corporate hires come into our portfolio companies,” says Tom Wrenn, Managing Partner of the private equity firm ECI Partners. “The key is that they are coming from the right culture. They’ve got to have that ‘owner’ mentality rather than the limited authority of a middle manager.” *Source

A CFO we spoke to who made the switch from the corporate world echoed this, saying that his experience of corporate M&A and working with fast-growth businesses allowed him to transition effectively. He also noted the importance of operating at pace and focusing on a broad agenda, to “juggle many balls at one time” and be “comfortable operating with ambiguity".

An analytical approach

The key to identifying these individuals is to take an analytical approach to CFO hiring, ensuring a candidate’s balance of situational, domain and functional experience fits with the needs of the existing team, the business, and the growth journey. At the current time, requirements are likely to include a substantial level of functional finance experience, balanced with situational experience that aligns with private equity and current market challenges. As domain (or market) experience invariably exists within the current team, this is likely to be less important.

But critically, investors should be looking closely at behavioural analytics, such as our PACE assessment, to predict how CFO candidates are likely to perform in the uniquely challenging environment that is private equity and work effectively with the rest of the leadership team. PACE is based on research showing that the best-performing private equity leaders and leadership teams score highly for four behaviours: Pragmatism, Agility, Curiosity and Execution. Understanding how a CFO candidate stacks up against these enables investors to look beyond the usual criteria, plus check their alignment and compatibility with the existing team.

We’ve seen it work

At DRAX, we’re huge advocates of looking beyond private equity for top CFOs, and we’ve seen time and again that this approach bears fruit. In the last 12 months, 26% of CFOs placed by DRAX have been first-time private equity CFOs. We understand why investors do take some persuading at the outset and although clearly it opens up the candidate pool, this is not to make our lives easier. We genuinely believe that the calibre also increases when presenting a shortlist which includes candidates with and without private equity, who are proven and who are not. Why not try it next time…

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