PART ONE:
Deal flow has slowed significantly in 2023, which means that many CFOs in PE-backed businesses are staying put, awaiting an exit event. But as demand for tried and tested finance leaders increases to navigate a rocky climate, investors are fishing from a severely limited pool of CFO talent. Are rising salaries the only answer?
According to Pitchbook data, H1 private equity deal volumes fell 35% in 2022, and 51% compared to 2021. Investors are holding tight for valuations to improve and amongst those I’ve spoken to, there is confidence that the market will pick up in 12 to 18 months. But the lack of movement is having a knock-on effect on the talent market, as the usual turnover of CFOs comes to a standstill. Delayed timetables for crystalising value mean that many are holding out for the landscape to shift when in more buoyant times they would be ready to move on.
Inevitably, the slowdown of CFO churn is causing challenges on the other side of the market, where some increasingly nervous investors are looking to shore up their existing portfolios. Current uncertainty means that more than ever, investors are looking to mitigate risk, with a safe pair of hands and prior private equity experience to navigate a tougher, less predictable market. But given the reduced CFO movement we’re currently seeing, many are struggling to find the talent they’re looking for.
A diminishing talent pool
Competition for CFOs with prior PE experience is an ongoing challenge, given the recent rapid growth in the private equity market. In the last ten years, the UK market has almost doubled in size, causing a constant imbalance in demand for private equity experience and the pipeline of CFOs coming through. Plus, CFOs don’t tend to stay in PE-backed companies forever. Clients frequently ask for candidates with multiple private equity exits under their belt and my answer is always: they don’t exist, and even if they did, are you sure that’s what you want?
Managing Partner of the private equity firm ECI Partners, Tom Wrenn echoes this sentiment: “If you look for the perfect CFO – someone who is hungry for success, has experience in a PE-backed business, is available in the right time frame, and is in the right location so they’re not travelling hours every day – then you’ll probably be looking forever. So, the question becomes: where do you compromise?” *Source
As the lynchpin of the senior management team, and main investor contact, private equity CFOs must withstand intense pressure. While there are rare exceptions, most CFOs don’t want to do more than a couple of cycles, across more than a decade, before moving on to something new. For example, many choose to pursue portfolio work or mentoring, use their expertise to diversify through consultancy, or consider broader roles outside pure finance such as a COO or an M&A-focused role, while sustaining and enjoying the lifestyle they have earned.
Another trend we’re seeing amongst more experienced private equity CFOs is an interest in joining a business at the end of the investment cycle to help drive a rapid exit, rather than joining at the beginning of the cycle where there is inevitably more heavy lifting to be done.
Salaries on the rise
For investors currently on the hunt for a CFO with prior private equity experience, the immediate answer could be to significantly increase the salary and equity on offer, which some private equity funds are doing. We’ve already seen an explosion in compensation levels, with CFO salaries in private equity-backed companies rising from around £150,000 in 2017, to between £220,000 to £300,000 today. But in the current climate, is it wise to keep going higher, when rising interest rates mean the cost of doing business is already much greater than investors have become accustomed to?
Another option?
While some investors may accept ever-increasing salaries to secure a proven PE CFO, there is another solution, which is to prioritise behaviours and competencies over purely having CFO experience in private equity and leading exits. Taking this approach gives investors access to an untapped talent pool, while also ensuring they truly understand if a candidate's situational experience and behavioural profile is aligned with the business they are joining.
A candidate from outside the usual template won’t just come with more realistic salary and equity demands, but can also bring greater hunger, energy and motivation for a ‘private equity backed’ role than a CFO who has already been through multiple cycles. They have room to grow with the business while bringing possibly a more agile approach to maximising value, that isn’t clouded by previous PE-backed positions. We’ve seen from experience that they are just as capable - if not more so - of ensuring successful value creation.
Those investors who are prepared to challenge the usual CFO criteria won’t just win the talent race, they’ll also be gaining a competitive advantage at the same time. In my next blog, I’ll delve deeper into why a change of approach is needed and how organisations can identify those leaders who have what it takes to transition into a private equity CFO role for the first time.
Looking to make a CFO leadership change in your business? Contact Mark Tomley at mtomley@draxexecutive.com for an in-depth discussion about how our CFO practice can assist your business’s leadership change requirements.
