The misalignment of PE-sponsors and CFOs

The private equity landscape is characterised by uncertainty, volatile markets, and geopolitical conflicts.

These factors create significant pressures on CFOs, particularly those in PE-backed companies. According to a report from Accordian, 91% of PE-backed CFOs express concerns about job security after a private equity investment.

This represents a 25% increase since the previous report in 2019.

Nick Leopard, the founder and CEO of Accordion, highlights the anxiety among CFOs in the current market environment noting CFOs face novel fluctuations and unique challenges that require them to question their skill sets and ability to navigate through these uncertainties.

Expectations and challenges faced by PE-backed CFOs

Private equity sponsors have high expectations of the finance function in portfolio companies. Accordian’s survey reveals that sponsors expect CFOs not only to scale the business but also to play a strategic role in driving enterprise-wide transformation.

CFOs are expected to lead cost reduction, technology enablement, M&A, and other transformation initiatives to improve profitability.

The stakes are high for PE-backed CFOs, as they have a limited window of time to create meaningful transformation. Within 4-6 years, CFOs are expected to deliver significant changes that drive value creation.

The survey findings highlight three key areas of misalignment between sponsors and CFOs:

1. Diversification of CFO roles

Both sponsors and CFOs agree that CFOs need to be more multifaceted in their roles. CFOs are expected to think strategically about cost reduction, technology enablement, M&A, and other transformation opportunities.

However, sponsors and CFOs may have different priorities within these areas. While sponsors prioritize M&A, CFOs rank it at the bottom of their list. CFOs tend to focus more on cost reduction relative to their sponsors.

2. Data cleanliness

Another area of misalignment is the perception of data cleanliness. While 92% of CFOs believe their data collection efforts are strong, only 65% of sponsors agree.

This discrepancy raises concerns about the reliability and accuracy of the data used by CFOs to inform decision-making. To build trust and confidence, CFOs must ensure that data collection processes are robust and deliver clean and reliable data.

3. Focus on business objectives

There is a divergence in priorities between sponsors and CFOs. Sponsors prioritise M&A as a key driver of value creation, while CFOs rank it at the bottom of their list. This misalignment suggests that CFOs may be too focused on the present and not adequately planning for the future. CFOs should align their priorities with those of sponsors to ensure a unified approach to value creation.

Addressing the misalignment

To strengthen the relationship between PE sponsors and CFOs and address the areas of misalignment, the report provides a roadmap for success.

The following strategies can help foster effective partnerships and enhance value creation:

1. Embrace the expanded role of CFOs

CFOs need to adapt to their expanded roles and embrace the responsibilities that come with it. They should focus on defining transformation and aligning with sponsors and other C-suite executives on the necessary actions and levers for achieving desired outcomes. By demonstrating their ability to drive transformation, CFOs can alleviate concerns about their job security.

2. Establish clear communication channels

Effective communication is crucial for aligning expectations and priorities between sponsors and CFOs. Regular communication and collaboration can help bridge the gap and ensure a unified approach to value creation. CFOs should actively engage with sponsors to understand their objectives and provide insights on financial matters.

3. Prioritise data cleanliness and analytics

To build trust and confidence, CFOs must prioritize data cleanliness and analytics. They should invest in robust data collection processes and leverage technology to ensure the availability of clean and reliable data. CFOs should also focus on enhancing their analytical capabilities to derive actionable insights from the data and support informed decision-making.

4. Align business objectives

CFOs should align their priorities with those of sponsors to drive value creation. This requires a strategic approach to M&A, cost reduction, technology enablement, and other transformation initiatives. By aligning business objectives, CFOs can demonstrate their value and contribute to the success of the portfolio company.

Understanding the relationship

The State of the PE Sponsor and CFO Relationship report sheds light on the current dynamics between private equity sponsors and CFOs. While there is a significant level of alignment on job expectations and capabilities, concerns about job security persist among CFOs. This calls for improved communication, alignment on strategic objectives, and a focus on data cleanliness and analytics.

By addressing these areas of misalignment, CFOs can become better stewards of enterprise scaling and alleviate their job security concerns. The report provides a valuable roadmap for PE sponsors and CFOs to navigate potential friction points and build value-creation partnerships.

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