With once-promising growth situations turned distressed, exits delayed, and IPOs shelved, some private equity CFOs and companies find themselves mismatched―and looking to make a change in a largely virtual recruiting market.
For many private equity (PE) firms, the economic upheaval caused by the COVID-19 crisis has required a new set of strategic priorities, trading yesterday’s growth plans for today’s liquidity and crisis management needs. As a consequence, portfolio company CFOs are considering new situations, while some PE firm boards and owners are scrambling either to retain them or consider replacement candidates for evolving business conditions, according to Adam Kovach, who leads Spencer Stuart’s private equity practice in North America, and Karen Quint, consultant and member of Spencer Stuart’s financial officer and board practices. They discuss the pandemic’s impact on PE CFO searches and hiring, and what finance leaders without PE experience can do to better position themselves as candidates.
Q: How is the pandemic affecting CFO recruiting in the PE space?
Kovach: PE firms are not only doing more to hire top CFOs in the midst of the pandemic, but many are doing all they can to retain their sitting CFOs. Since March, I’ve seen a surge in counteroffers to prevent CFOs from leaving; in three cases, the CFOs were promoted to CEO in order to retain them. CFOs are almost always the No. 2 executive running the business and interacting with the board and the owners, so that can be a logical move at a portfolio company. That’s especially true when the CFO has the skills to manage through a severe downturn, the priority at this time, rather than just a growth focus.
One reason CFOs are accepting counteroffers rather than leaving is because this crisis can make it harder to establish a strong connection with a new company during the hiring process. In this virtual world, there are no long dinners with the CEO and the board to establish a rapport and build commitment.
Quint: At the same time, the current landscape is clearly prompting sitting PE CFOs to consider new opportunities as business and market conditions have changed. For many portfolio companies, the path to an exit has become muddied, almost certainly putting their plans on hold for at least the foreseeable future. In some cases, the CFO was hired to prepare the company for an IPO, and a lot of those plans have been shelved or abandoned. A situation that was appealing because it offered a quick path to becoming a public company CFO may have suddenly become a three-year restructuring job.
Likewise, PE firms are evaluating whether their sitting CFO has the right skillset for the conditions they will be dealing with over the next 24 to 36 months. We’re hearing from firms looking to replace a CFO hired a year ago to grow the company or prep it for an IPO with someone skilled at managing cash flow and paying down debt under distressed conditions.
What specific skills are in demand in CFO searches?
Quint: For PE CFOs, managing cash, debt, and debtholder relationships are always top skills, and they’re even more sought-after in the current crisis. When we get calls now to replace an existing CFO, the lack of cash flow and liquidity management capabilities is usually the reason. The same is true when it comes to how much PE companies are prioritizing CFO experience. Even pre-coronavirus, 85% of our PE placements were experienced CFOs, compared with 28% for public Fortune 500 companies. Since March, that number could be closer to 95% in the PE space. Companies want a CFO with topnotch cash management skills who has led a successful exit―and they are willing to pay for that experience.
What can finance executives without PE experience do to better qualify as portfolio company CFO candidates?
Quint: Generally, PE firms are wary of public company CFOs because they’re coming from a huge team to a situation in which they’re really going to have to dig into the details and be very hands-on. To counter that, public company CFOs interviewing for a PE job should be prepared to demonstrate their deep knowledge of the business and the numbers and how they’ve used that knowledge to create value in previous roles. It can also be valuable to identify and develop relationships with PE firms that tend to favor IPOs as an exit path for their portfolio companies. Public company experience can be a good fit in those cases.
Kovach: It’s important that public company finance executives consider what type of portfolio company best aligns with their skills and experience. For example, a portfolio company looking to do an industry roll-up will likely favor candidates with M&A and integration experience, so coming from a public company that has acquired a lot of companies will be a big plus. Candidates looking for their first CFO role will need to have strong operational backgrounds and be proven business partners. Divisional CFOs can be strong candidates, particularly for larger portfolio companies, but it’s hard to make a strong case without experience in banking relationships and cash management, so working in the treasury function can be helpful.
What has surprised you most about CFO recruiting in a virtual environment?
Quint: The speed of searches is remarkable. With everyone virtual and working from home, we’re setting up interviews that normally would take weeks to arrange because of travel and scheduling logistics. Candidates now often complete an interview slate with the executive team in days instead of weeks. One unexpected consequence of this accelerated, more convenient process is that candidates can be surprised by how fast companies are willing to move. On several occasions, we’ve had candidates who were receptive to exploring the opportunity, but when a couple of video interviews almost immediately led to an offer, it turned out they weren’t seriously interested in the job and had only interviewed because virtual made it so effortless. We have adapted our initial screening to ensure candidates’ interest.
A related challenge concerns mask-wearing. We recently had two cases in which the client brought the finalist candidates in for in-person meetings. Because the meetings were indoors, masks were worn. In both cases, the interviews fell flat. I believe that was because masks can deprive people of some of the facial expressions and other visual cues that are so vital to social interactions.
Kovach: Expectations are lower for video interviews, but they pose similar relationship-building challenges. It’s difficult to replace the sense of the other person made possible by spending time together over dinner. We have tried virtual dinners and virtual drinks between candidates and board members to make the meetings more casual, and we’ll continue to experiment with different approaches.
On the positive side, I think the pandemic is making clients more flexible about hiring a candidate who doesn’t want to relocate. With the crisis showing that working from home is viable and, in some ways, advantageous, increased openness to having a CFO combine virtual and in-office work will be part of the next-normal, post-coronavirus world.
—By Andy Marks, Deloitte Services LP, senior writer, Deloitte Insights for CFOs