Ramping Up Private Equity Portfolio Company Financial Management

When middle market private equity (PE) firms acquire a controlling interest in a company, their agenda for the new portfolio company is typically aggressive.

They have made the investment because they see potential to scale the company’s revenue, profits and valuation rapidly before exiting the investment, typically over a 4-7 year period. The PE firm’s ability to select promising investments, manage and optimize their growth and navigate an exit—sale to a strategic acquirer, or to another private equity portfolio company, or an IPO--is the premise on which they have raised capital from limited partners. 

Ramping Up Private Equity Portfolio Company Financial Management

Now that a PE fund has acquired the new company, what kind of and how much financial management capability do they require the company to have? While a lot depends on the size of the company and the complexity of its operations and finances, a number of factors argue that the new portfolio company may need considerable financial capability:

• The PE firm and the company will need to put together a 100 Day Plan that addresses immediate steps to launch its growth strategy.

• The rapid expansion of the company’s business that the PE firm envisions will require rigorous planning and forecasting to ensure that growth does not exceed the company’s cash flow and planned working capital funding and that the PE firm-provided capital does not run out. 

• The PE firm will require intense tracking of the company’s operating results and progress in executing its strategy, involving regular analysis of both financial and operating metrics. It needs a financial manager at the company level to facilitate this tracking.

But other factors suggest that the PE firm will want to go slow in ramping up the portfolio company’s financial management:

• The principals of private equity firms tend to have financial backgrounds, especially as bankers. They may feel they can develop a good deal of the tracking processes themselves.

• The private equity firm is typically keeping the management team in place. It is the CEO (often the company’s founder) whose vision, product knowledge, and contacts in the market place represent a good deal of the company’s value that the PE firm has acquired. If the company has a competent controller or bookkeeper who has the confidence of the CFO, the PE firm may not want to make a change immediately.

• The PE firm wants to put its capital to work growing the company: expanding product/ service offerings to new market niches; increasing the size of the sales force, stepping up advertising and promotion. Spending a lot on a strategic CFO may seem like an investment in the “back office” that the company can’t afford.

As a CFO who has worked with a number of PE firms, I understand both sides of this argument. In many cases there may be a compelling approach that doesn’t involve hiring a high priced CFO immediately or having unrealistic expectations for the company’s controller. In the next article in this series I will lay out an approach to scale up the portfolio company’s financial capability gradually, in time to enhance its value for an exit transaction. 

About the Author

Jack is a strategic CFO with experience in public and private companies, generally high growth and acquisition-oriented. He has experience with private equity as CFO of portfolio companies and as an operating partner including helping to drive exits. Jack has extensive experience in raising debt and equity for public and private companies, IPO’s and M&A. He was recently Vice President of Investor Relations for China Hydroelectric Corporation, a NYSE-listed company operating power generating facilities in China. To learn more, contact Jack Here.

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