The excellent PE-backed CFO hit the numbers in the year. Great people think beyond them. Focus on the next exit from the first day. difference? A lenient commitment to promoting long-term stock value, even at the expense of short-term profits.
However, the data suggest that CFOs and sponsors may be misaligned in this regard. A recent accordion survey of CFOs and 100 sponsors, backed by 100 PEs, revealed that most CFOs prioritize annual performance over equity value, and that they believe that sponsors want. However, two-thirds of sponsors prefer portfolio CFOs to focus on maximizing stock value, even at the expense of short-term performance.
We get it, as well as PE-backed CFOs and PE partners, respectively. CFOs, especially under first-time system ownership, do not feel like the truck is off. Below is how CFOs can jump from good to great by focusing on driving long-term stock value.
Two questions
A good CFO understands that a valuable drive is essential to a successful exit. For others, there is a need for a change in mindset. From thinking about work at the inset of a year to adopting a long-term perspective tailored to a typical private equity hold period of 4-5 years. Early in their tenure, the great CFOs ask (and answer) two important questions.
- When my PE company invested, the stock value was x. You must reach Y at the exit. What can I do to take us there? Sponsors measure CFO success with their ability to meet exit value creation goals as quickly as possible. It often means trading short-term profitability for long-term profits. And that means that most of the time it makes you feel comfortable spending a significant amount of money.
- During the pending period, which investments will most effectively promote stock value? Effective CFOs act on equity driving investments when prompted by sponsors. Great CFOs are aggressive, identifying and defending equity driving initiatives that they believe will move needles (either organic or via M&A) and pushing sponsors and prioritizing.
Invest without reducing
Spending money may seem heresy to CFOs who live by cost optimization. However, CFOs favored by PE should remember that they are different breeds. Their job is to invest with a high ROI and pay a return by the exit (not necessarily the end of the year). They have to spend their money to make money. Such spending initiatives include:
Early investment in leadership talent. A good CFO encourages you to hire expensive senior team members over time and be careful not to over-cost the year. Supported by the great PE, CFOs know they can't afford to sacrifice years of a unified leadership team. Instead, they take an equity-centric approach to talent and invest early in building a senior leadership team. More broadly, they see it as an early investment to expand employment within the company to ultimate capacity. This includes more sudden upfront costs that can be sacrificed in annual profitability, but is rewarded by promoting stock value and accelerating performance when it is exit-enabled.
Creating technology and data infrastructure for scale. Many portfolio companies don't have a scaling foundation. Furthermore, acquisition companies tend to have different systems, causing data silos, inefficiencies, and unreliable information that hinders informed decisions based on business-informed and informed decisions. A good CFO can overlay cheap BI stop gups, and the system works while the short-term target is being met. But it does not promote value at the exit.
A good CFO implements Holistic ERP/Infrastructure Systems to identify and meet unique technology needs of your business, and understands that the optimal technology stack is an investment that drives value. On the data and analytics side, they spend money to get a data house neatly and know that clean and practical data supports all stock driving strategies. Also, good CFOs are spending money exploring emerging technologies (such as AI) to ensure that first-movers don't give away to their competitors the benefits of first-movers.
Re-engineering operations. New tariffs on imported goods are imminent. A good CFO can plan a scenario and look for alternative sourcing and manufacturing facilities outside of China and other affected countries. A great PE back CFO does more than that. They view tariffs as a compulsory function and an opportunity to redesign processes for efficiency and simplification. They will help you find hidden pockets of value that can be exploited by spending money on external expertise and redesigning the operating lever. They see it (rightly) as a strategic equity value investment that pays itself by amplifying returns at the exit.
Take a proactive approach to acquire growth. A stock value-focused M&A strategy requires identifying targets that may not work with current levels of profitability or growth for the acquirer, but can generate significant value over time. Also, a good CFO will ensure early on not only financial growth, but also planning employment and integration strategies, but also consolidating the system, effectively expanding new assets, and enjoying the future profits and synergistic effects of the acquisition.
Motivation of CFOs
To get from good to great things requires work from CFOs and sponsors.
sponsor. Smart Sponsors don't just provide CFOs with a permit structure to think about long-term stock value at the expense of year-end profitability.
It starts with compensation. In many cases, sponsors will inflict or cash bonuses on year-end performance metrics only, encouraging actions that lead to short-term benefits. Instead, sponsors should link at least some of their CFO coverage to stock value growth, with a framework that reflects the importance of long-term investments. A well-designed bonus structure may include annual company performance, stock value growth, and significant weighting of individual targets.
Beyond that, sponsors must match CFOs in handling costs that strengthen stock value (e.g., leadership, IT, or operational extensions). In some cases, these investments can even be tracked and measured separately from the performance of the core company. Sponsors and management teams should be at Lockstep to ensure that investments are not perceived as having an unintended impact on CFO (or other management team members) performance metrics.
CFO. CFOs cannot spend their money on the vague promise of driving equity value. They need to sponsor the sponsor in advance and prove it to them. That means establishing tools and metrics to measure ROI. By presenting projections, tracking performance levels and improving reporting speed, CFOs ensure that sponsors are rewarding their investments.
Part of thinking in the long run is looking at the granularity of everyday life. A simple advice, but it works. The smart PE back CFO looks at the daily calendar. When most meetings and phones deal with tasks that are not related to stock value driving, they spend time on the wrong thing. Changing the focus of your daily life often means rejecting and delegating unnecessary meetings. For example, assign budgeting workflow tasks to team members and double the strategy sessions with investors.
A good PE-backed CFO is monitoring the final results. A good CFO looks beyond that and invests money where it counts: promotes stock value.
