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From scorekeeper to value creator: Five priorities for private equity portfolio company CFOs
February 21, 2023
The CFO’s role is rapidly evolving, and the transformation is particularly challenging for finance leaders at private equity-backed portfolio companies. The industry is digging deeper for value creation, and finding new ways to drive growth will remain the most important issue over the next several years.
To play an active role in this growth strategy, portfolio company CFOs must continue to move beyond day-to-day financial affairs to data-driven scenario planning, providing accounting and reporting insights that enhance transparency and create value. It will be crucially important to connect leaders responsible for information technology, climate and cyber risk management, human capital, supply chain, tax compliance and non-financial disclosures.
A private equity portfolio company CFO, tasked with working across the enterprise to find new ways to create value, has a unique opportunity to lead the organization’s agenda on the major issues and challenges of the day. These five strategies can help finance leaders increase their impact:
1. Align with your private equity firm on value creation
Concerns around inflation and forecasts of a potential recession continue to create challenges and obstacles to economic growth for organizations. High interest rates are expected to persist well into 2023, and many funds are seeking to commit a higher proportion of cash to their deals, according to our Private equity: US Deals 2023 outlook. Private equity firms, facing increased scrutiny on performance, are responding by preparing for unpredictability through flexibility and diversity in their deal strategies.
Where to start:
Effective portfolio company CFOs proactively communicate with the private equity firm and align on regularly reevaluating and updating the value creation plan. Nearly half of executives responding to PwC’s 2022 Next in Private Equity Survey said they update their plans quarterly. Leaders in this space often follow a set of value creation techniques. They partner with advisors who have deep technical expertise and industry experience in order to plan efficiently on a digital platform, reduce waste and remain focused on profitably.
2. Accelerate digital transformation
Private equity firms are prioritizing data strategies to meet the market’s transparency demands and help transform business at the portfolio company level to create better returns for investors. Forty percent of the private equity portfolio company respondents to PwC’s 2022 Next in Private Equity Survey said that digitizing and/or automating more areas of their company is their top strategy for creating value. Enterprise digital transformation requires acumen in advanced analytics, artificial intelligence applications and cloud technology.
Where to start:
Portfolio company CFOs can lead on business process standardization and digitization in the finance function and beyond. They can plan for the cost of accelerating digital transformation through AI, automation and cloud solutions, as well as digital upskilling and mentoring, as people functions combine with technology. The more tech-enabled the team, the greater value it can drive.
3. Focus on cultivating talent
How can businesses modernize their finance operations? By taking a human-led, tech-powered approach to transformation. Talent attraction and retention is consistently cited by business leaders as a significant risk, and targeted hiring is a key strategy, according to a recent PwC Pulse Survey. With stiff competition for finance talent, professionals with skills in data analysis and forecasting — and the technologies that power them — are in great demand.
Where to start:
A portfolio company CFO can add value to a company by rethinking how to lead: Emphasize the human needs of colleagues, lead with transparency, and take a teaming perspective focused on the qualifications of team members. Invest in targeted upskilling. Hire team members with the right mix of skills, and as a result enable more accurate analysis and scenario planning — increasing enterprise efficiency and effectiveness. When it comes to strategic decision making, a finance group’s analytical skills and ability to quickly unlock insights from financial data are as important as digital tools.
4. Promote ESG initiatives
Private equity firms are becoming more selective about their targets: 37% of respondents to PwC’s Global Private Equity Responsible Investment Survey say they turned down an investment opportunity due to environmental, social and governance (ESG) concerns. Private equity market investors are making it clear that ESG has become a priority for meeting growth, talent and stakeholder challenges, and creating value. Private equity portfolio companies that succeed in this space use ESG to drive the financial health of the business. They focus on ESG strategies to mitigate risks, identify opportunities and drive competitive advantage.
Where to start:
The CFO will likely lead the company’s efforts to report greenhouse gas emissions data and other metrics. Bring a perspective on what aspects of ESG are most important to the organization’s industry, and how sector peers are investing in and implementing ESG commitments. Support the collection and analysis of ESG data and build out an ESG plan with the help of this simple framework. CFOs occupy a place at the intersection of purpose and practice: They have the opportunity to connect the dots between fiscal responsibility and transparency. Portfolio company CFOs can make a difference in this arena by working to close the gaps.
5. Build trust and purpose
Trust has an enormous impact on customer loyalty and buying decisions, employee retention, and the relationships between private equity firms and portfolio companies. Forward-leaning CFOs are expected to build trust with all stakeholders, especially private equity firms, through proactive communication and effective management of deadlines.
Where to start:
Achieving consistent, efficient and timely communication with the private equity firm, and by extension employees and other stakeholders, requires CFOs to understand — and avail themselves of — more than just the enabling technology available to facilitate strong collaboration. Successful CFOs are truth-tellers and stewards of good governance. They do more than just protect the company — they serve employees, investors and customers. CFOs now need to pivot their leadership style to become more “operational,” according to Wes Bricker, PwC Vice Chair, US Trust Solutions Co-Leader.
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Explore the latest articles on our Private Company Perspectives page and check out our private company resources.
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