A STRONG FD – DELIVERING SUCCESS IN PRIVATE EQUITY-BACKED BUSINESSES

Dan Adler, partner at B2B services and technology investor Lyceum Capital, explores the multifaceted role of an FD in a private equity-backed business.

The finance director’s role in a private equity-owned business assumes more responsibility than a similar position in a corporate setting. Acting as a partner to the chief executive, the FD is equally accountable for delivering the business’s growth plan. A successful FD will demonstrate strong financial skills, as well as leadership qualities, an ability to be decisive, and have a thorough understanding of the challenges that come with working in a growth-driven environment.

Adapt your skills

As investors, our role in appointing an FD is to support the CEO’s decision, although we find that the best hires are individuals with whom we can also build a relationship. They understand what we are trying to achieve and our goals align. Any FD considering a role within a portfolio business must be committed to the growth strategy, as implementing the plan can be extremely demanding on time and energy.

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The FDis expected not only to oversee finance functions(such as cashflow and budgeting) but also supports business-wide initiatives that enable growth, for example successfully executing a buy and build strategy and the efficient integration of add-on investments in pursuit of synergies. A good FD needs an eye for detail as well as the bigger picture.Demands on an FD’s skill set will rise as the business grows. Any FD working in a private equity-backed business continuously needs to acquire competencies that will support the business as it moves along its growth trajectory.

Finding the right talent

While an FD within a portfolio company is required to work independently, often without a large department to delegate to, transforming a business is a team effort.

Ideally, the skills and experience of the FD and CEO complement each other and not only in finance but also in operations. This peer relationship is critical to the success of the deal and requires mutual confidence.

When recruiting a finance team, picking the right talent to support the FD and incentivising hires appropriately is vital, as is defining targets and KPIs upfront. Like the FD, the team needs to understand the demands and rewards of the private equity journey. A strong financial controller plays a key role in the team and making the right hire is critical. The goal should be to establish robust processes and controls that could function without the FD, if necessary.

Tackle challenges head on

The path to value creation is never a straight line and FDs need to be effective problem solvers. Being able to stick to the growth plan engenders confidence, but inevitably challenges arise. Effective FDs do not wait to flag issues or delays. Their relationship with investors allows them tobe upfront and have the courage to admit early on that something is not working. They communicate consistently with shareholders and the board and are able to revise plans to get back on track.The best FDs have read everything, are informed and have answers ready. It is a leadership role that requires interaction with the business at large, both internally and externally, and not only when things are going smoothly.

Champion governance and compliance

Unlike most other businesses, a portfolio company is always potentially up for sale. Its books, processes and controls must always be ready for scrutiny.As one FD told us, part of his job is to “make sure everything is tidy”. This may require, for instance, preparing accounts in a dual format for the UK and US if the ultimate buyer is expected to be a US-based entity. This can save time in the long run and increases the confidence of a US buyer in the information provided.

As investors, one of our goals is always to professionalise the organisation of a portfolio company, including processes, roles and functions. Ensuring the business meets industry best practice and is compliant with current regulations is central to its evolution. The FD plays a key role in enforcing proper governance. The consequences of failing to meet standards, including loss of market position and reputational damage, will undercut value creation. Conversely, by instilling solid governance, the FD assists growth, for instance by securing financing on more favourable terms. Effective compliance procedures are inevitably reflected in the valuation of a business.

Return on investment

Working in a private equity-backed business can mean high financial rewards.In our experience, however, it is the challenge and excitement of growing a business that motivates successful FDs most. Ultimately the FD is the guardian of the integrity of the deal. He or she is a central figure in creating value, with an impact on both profits and the business’s ultimate valuation.

Lyceum Capital is a lower mid-market private equity investor in UK B2B services and technology businesses.

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