Nearly half of private-equity fund managers and portfolio-company finance chiefs say private-equity-owned businesses are understaffed, including key finance positions, according to a recent survey.
Company executives and private-equity managers also said that portfolio companies increasingly struggle to find people with the skills needed to navigate today’s high interest rates and declining investment exit opportunities, according to the survey from financial-advisory and consulting firm BDO USA. Indeed, 54% of portfolio-company chief financial officers and board members said it would be tough to achieve the investment goals of their private-equity owners, according to the survey, conducted for BDO in March by researcher Censuswide.
Leadership roles at portfolio companies are becoming more important as the private-equity sector contends with a sharp slowdown in deal-making and rising credit costs. Ultimately, it can determine whether business objectives and fund managers’ investment targets are met, consultants say.
“Investors are having, quite frankly, less patience with CEO [and] CFO performance than they have in the past,” said Dan Hawkins, founder and chief executive of Summit Leadership Partners, a management consulting firm for private-equity and middle-market companies. As private-equity firms see limited opportunities to sell their investments, Hawkins said, fund managers are looking harder at company results and raising the bar for their executives.
Meeting elevated expectations when short-handed in critical areas such as finance and accounting can demand trade-offs, said Jim Clayton, a management consulting principal and private-equity co-leader at BDO. “So you see projects either getting deferred, extended or they have to bring in consultants to help balance the workload,” he said.
In some cases, companies fill in staffing gaps with temporary help while seeking permanent recruits, Clayton said. He noted that at one client company, permanently filling a CFO job took nine months.
Staffing challenges have affected performance in the mining industry, for example, a global survey by consulting firm McKinsey found, with nearly three-quarters of mining executives saying a talent shortage kept them from reaching production targets and strategic objectives.
CFO jobs have traditionally been one of the toughest jobs to do—and fill—in portfolio companies, consultants said.
“It’s getting even harder now [to fill such roles] because there’s such a shortage of CFO talent available that really understands how to work in private capital,” Hawkins said. Most of the private-equity managers that his firm works with have from three to six CFO openings among their holdings, he said.
Clayton said the challenges in filling vacancies such as CFO and controller jobs became more pronounced as employers began requiring workers to return to the office as the coronavirus pandemic eased. That has narrowed recruiting choices for some amid a greater reluctance to relocate and increased travel costs. Some companies and their private-equity owners have “self-tightened the market,” he said.
A lack of experience working under high interest rate conditions adds to the challenges faced by recruiters looking for CFOs and other executives. Most of the company CFOs in the survey said they didn’t take on a similar role until after 2008, when central banks pushed interest rates to historic lows to spur a recovery from the financial crisis. About 60% of the CFOs surveyed said they have been in their current roles less than a decade.
Meeting growth expectations often requires adding business through acquisitions. But with the rise in rates and the sluggish rate of investment exits, 55% of CFOs at companies owned by larger private-equity firms said getting deals done has been a challenge.
Fund managers increasingly view the CFO role as a collection of functions and seek to hire people with skills to fill in gaps around a company’s existing staff, said Nick Leopard, founder and chief executive of private-equity consulting firm Accordion Partners.
“Even in the best of times, finding a CFO that can do it all is very hard,” Leopard said. So private-equity firms tend to call on CFOs who have shown they can do the job, turning to them for help when a portfolio company needs the skills they can offer.
Those CFOs ranked highest by private-equity managers are often “change champions” who understand what drives a company’s value and stay focused on those elements, Leopard said. They also possess the ability to sketch out the company’s financial position when it comes time to sell the business.
“Not only do you have to have the right person starting off,” Summit’s Hawkins said about a fund manager’s investment. “But as you get close to exit, there can’t be any shakiness either on the CEO or CFO role because when you start [preparing for a potential sale] A) you’ve got to have a strong CEO to present the strategy and the business, and B) you have to have a strong CFO who can really articulate the financial strength of the company.
Nearly half of private-equity fund managers and portfolio-company finance chiefs say private-equity-owned businesses are understaffed, including key finance positions, according to a recent survey.
