Roundtable: Getting your management team crisis-ready

For the first time in decades, management teams of PE-backed companies are facing high inflation and rising interest rates. In a roundtable hosted by Real Deals and HedgerWay, a panel of private equity GPs and advisers discussed how to recruit and support C-suite management, most notably CFOs, in the face of building headwinds.

At the table

• David Barbour, FPE Capital
• Maria Carradice, Mayfair Equity Partners
• Matt Cobbold, Palatine Private Equity
• Cécile George, LDC
• Simon Gilbert, H2 Equity Partners
• Nigel Hammond, Vespa Capital
• Oli Lampkin, HedgerWay
• Tristan Nagler, Aurelius
• Daria Polunina, BGF
• Sanjeev Sibal, HedgerWay
• Ben Slatter, Rutland Partners
• Nicholas Neveling, Real Deals (moderator)

To start, I first wanted to get a sense of how comfortable private equity is with changing management?

Nigel Hammond: Changing a chief executive or CFO is a serious proposition and not one we would undertake lightly, but I would say that private equity attitudes to reconfiguring management teams have evolved over the years. The world is a more complicated place, so it's inevitable that sponsors will look at management teams in new ways.

The importance of communicating digitally with customers, the recognition of the importance of employees and hybrid working have transformed business and the workplace. The core management team will seldom have the skills to cover all these areas and will require additional support and expertise.

Matt Cobbold: In every investment committee, we ask if the management team is one we can back, and if it’s the management team for the future.

Usually, the team members are already doing too many jobs themselves. Our objective is to help them build a better structure that will enhance what they are already doing and give them more strategic breadth to push forward on growth initiatives. That will involve bringing more experience and specialist expertise into a management team. We are a growth-focused investor, so for us it is about getting things in shape to properly report on the levers that will allow a business to scale in a big way.

Frequently, the FD or CFO will be at the heart of this and lead the implementation of forecasting and cashflow management. A portfolio company has to have the bandwidth to continually speak to how things look for the next quarter. This is especially important at the moment. When times are tougher, visibility is becoming more and more important.

Matt mentioned the tougher macro backdrop. When interest rates and inflation are climbing for the first time in decades, how equipped are current management teams to navigate this?

Maria Carradice: We have had a torrid four years of constant change and many businesses have had to reinvent themselves. Management teams are learning that being more agile is the way of the world going forward, at least for the near future. We don't often change management teams but we do look to strengthen them.

One thing that we now consider in greater detail pre-deal is whether the bench and support are sufficient within a business to support it through periods of uncertainty. It is standard practice for us to talk to management about the second and third tier of talent, and to understand what the long-term plan for succession planning is. All of this happens upfront in open conversations, so management is clear on where we are coming from.

I do feel some sympathy for the CFO when everything is so fluid and unpredictable. They are typically reporting on historic numbers and firefighting, and are the first to come under pressure if forecasts aren’t met.

Ben Slatter: The CFO role is certainly the first to come under pressure and often the first to be changed. Most of the businesses we are buying are privately-owned companies that have grown and need help getting to the next level. Often, the finance function is underinvested in that journey. Our new investments will normally have lots of data but lack the ability to turn this into information and KPIs to help with decision-making.

You often find that chief executives aren’t that focused on the balance sheet and aren't that focused on cash. A strong finance director is critical to manage those areas. In the current environment, getting the finance operation in shape is even more of a priority. With inflation, it's absolutely critical that you've got a strong finance function to provide accurate information on a timely basis, to enable the business to stay ahead of the curve, understand where you're making money, where you're not, and crucially manage cash and headroom. They've got to be on top of their game.

Bringing things back to the current environment, where are management teams particularly stretched? What are the pressure points?

Daria Polunina: There is a general slowdown on the revenue side. How do you deal with that? It starts with solid reporting that can tell you what is going on early and provide a good grasp on the pipeline. The reporting is key. When that foundation is in place, strengthening the commercial teams really makes a difference. It allows you to bring in talent and expertise in a structured way.

It is common to come into a business and find overstretched management teams and a few people doing multiple jobs, which is not the best solution. Structured reporting, a clear value proposition, a clear understanding of the customer profiles you want to go after, and a good grasp of that pipeline, are essential at the moment.

What about the sector piece? Are any sectors facing a more difficult period than others?

Polunina: As you would expect, consumer retail is tough. Consumer confidence is softening with the cost-of-living crisis and there is still the aftermath of Covid.

Businesses have been quite good at trying to be flexible and trying to adapt very quickly. During lockdowns, businesses that had the platforms to sell online switched to that. After Covid, the challenge is how you take the high online growth through the pandemic forward, at the same time as supporting the physical retail footprint. It is tough.

Labour shortages and staff retention have been another challenge in retail and hospitality. People have left the workforce or changed jobs, with Brexit also posing challenges in recruitment.

Simon Gilbert: Consumer is an obvious area where it is difficult, but the vast majority of sectors will face pressure of some sort.

When it comes to what management needs to do, and whether a management team is fit for purpose, the good teams will cope well, while teams that are a bit weak will probably struggle. The current environment will make those differences more pronounced.

Management teams have faced many different challenges during a very volatile five years. We have had Brexit and then Covid, and now this. Through all of that, I think you've probably worked out which teams can respond and deal with things well, and where management team changes have to be made.

David Barbour: I would share that view. Since 2008 we have invested exclusively in software businesses and our experience is that a good chief executive is a good chief executive in any situation, and will instil a culture that motivates teams through difficult periods.

For a CFO there is perhaps more of a premium on experience, but in many of our businesses the financial controllers (FCs) are the unsung heroes. Do not underestimate how much a really good FC can make life easier for a CFO. If all the reporting is coming out clean and working capital can be put on a reliable 13-week forecast, the CFO can move onto the next stage and focus on strategy.

Many people don’t look at that FC role but it is quite a difficult role to get right. Often, the FCs are not in the equity yet, even though they have been there all the way through and are holders of the corporate memory. What we are not good at as an industry is growing our own CFOs, as the reflex is to bring in someone who has the experience and has done a PE-backed buyout already. At FPE Capital we do work hard to lay out a career path and step up FCs (including from other larger businesses) into CFO positions.

One of the hardest things to do is hold back someone who's grown up through the business from the CFO role because they are not ready and it’s not good for their career to do that too soon. It can be tricky when you come in and put a CFO above them.

Sanjeev and Oli, what are your clients asking for in terms of profile and skillset? Has that shifted in any way as interest rates and inflation have climbed?

Oli Lampkin: That’s an excellent point in terms of the value of a strong financial controller, about which our clients are becoming increasingly aware. The value of getting the nuts-and-bolts accounting done right to deliver clean numbers cannot be underestimated.

In turn, we look to identify CFOs that can step back from the day to day and provide broad strategic leadership to fundraising, supply chain management, procurement and foreign exchange hedging.

There is therefore a clear delineation between the FC and CFO roles; in the case of the latter, a consistent demand for the experience of two or three exits under the belt.

Sanjeev Sibal: We have seen clients become more and more granular in terms of demanding specific industry knowledge and experience from prospective CFO candidates. This varies in importance from sector to sector, with client decision-making primarily driven by where their portfolio business is within its development cycle. Where they are in the cycle also dictates the requirements for the traditional accounting and controls profile, versus more commercial profiles with capital markets and fundraising experience.

The key theme, cutting across all hiring decisions, is experience.

What happens in situations where there is a long-serving CFO that maybe isn't quite up to the rigours of private equity ownership. How do you manage that?

Cobbold: One of the priorities once the deal is closed is to work on a talent development programme. We look at the team and think about where it needs to be on exit.

Working out how to move forward with the incumbent FD will be central to that. If the FD is almost certainly not going to grow at the pace of the company, you have to balance making a change with retaining the knowledge of that person. It is always difficult.

Most of the time, the FD will want to leave if the plan is to bring in a new CFO. FDs are rarely junior and won’t have a long career ahead of them, so there is not much incentive to work underneath a newcomer.

Gilbert: I think it is unusual for the FD at the time of the buyout to stay on all the way to the exit. We invest in founder-owned companies and they invest too little in the finance team, so the chance of an incumbent being able to withstand the rigours of private equity is quite small.

Tristan Nagler: I can't think of a single instance when we have brought somebody in and the incumbent has stayed on.

You dilute the corporate memory when an experienced CFO leaves, which is really hard to deal with. It's a real shame. But on the other hand, we find that making the business a genuine meritocracy is better in the long run. We are genuinely trying to improve things and when you make a change, you will regularly hear a sigh of relief that we've upgraded.

We rarely regret making a change because we moved too quickly. When it comes to the finances of a company, you can't afford to delay because you only have one chance to make a good impression with your lenders and your suppliers. You can damage relationships pretty quickly if you're not all over it.

Carradice: It can be very difficult to replace the CFO, especially when the CFO is the right-hand man to the chief executive. I think we do know when a person is not right but we often give them the benefit of the doubt when we should probably make the change sooner.

Slatter: It is easy to put off making a change but you don’t regret it when you actually get around to doing it. Often, the change will come in the finance function when the pressure comes on and more is expected of the business.

I think all of us like to make the big changes in a business – in terms of cultural change, systems, controls and leadership – within the first six to 12 months of a hold. If you are a year in and the business has still not made the progress you expect, and people are not responding to the higher demands, then you know it is time to rejig the management team.

It is not easy and when you have already travelled a period of time through your investment, it can feel like taking a step back before you can move forward again.

Is it immediately obvious when there are gaps in a management team?

Cécile George: I get involved pre-deal quite a bit and you get to see quite quickly if a management team is keen to get better and to work on something, or whether they get defensive whenever they realise they have a gap somewhere.

If people are willing to look at the issues and do something about it, that's a good sign. Those are usually people that we can continue to work with and support. That said, you can’t jump to conclusions based on a few conversations. Once a deal is agreed and the environment relaxes a bit, people can show a different face. Often, a management team will be going through this process for the first time and you can't expect them to be comfortable with private equity ownership right away.

I think you also have to dig a bit deeper and look at the people reporting into the CFO. I work very closely with the commercial teams and they're a very important part of making sure that the CFO reporting is good. A CFO can't really do the forecasting alone because the finance department doesn't speak to the customer. To ensure that the CFO is going to be successful, you have to have that level underneath the CFO sorted out.

When you can see that senior management will require replacing and supplementing, how do you navigate that conversation?

Hammond: Pretty much every single one of our deals will be the first private equity investment a business has taken on. The first thing we have to do is persuade the chief executive that we are good people to have around – and we will only invest where we are impressed with the balance of the senior team.

That said, we do find that the businesses we back are looking to transition and scale, and are open to having a conversation about how an experienced CFO from the outside can add value. If we back the right chief executive then they will be dynamic, they will be ambitious and they will understand, hopefully, that strengthening the finance function is a positive move.

These conversations are much easier and more fruitful when you are working with a chief executive in partnership and you are clear about what you want to do before you invest.

It is worth adding that you won’t have to change a CFO in every situation. In some cases, they are highly competent when we arrive.

Carradice: We do discuss the makeup of the management team with the board. That starts with a very straightforward conversation about the requirements in terms of the board pack and the data that we will need. We also discuss the investment thesis. If the plan is to do an IPO in two to three years, then it is very obvious to everyone that you have to have a finance team of a different calibre in place to deliver on that ambition.

If a business is doing its second or third buyout, we tend to wait and see how the finance team performs, and if we feel a change is necessary, we take that to the board where we also discuss succession planning more broadly. If an FD is of a certain age or might not want to serve another term, you have to plan for succession from the offset so that a new FD coming in has time to settle in.

Barbour: We have a management team assessor who works with us on retainer and will spend a good chunk of time with the management team. This individual will work with the team and, in almost all cases, help to coach the chief executive on how change is going to happen. It helps to have that external voice so that the process is not completely bilateral and personality-based. It takes the conversation away from being: “It’s just the private equity guy saying this.”

Polunina: As an investor in founder-led companies, our investment team spends a lot of time assessing management teams pre-investment and we are very open with them when we think they actually need to bring somebody onboard. Sometimes we even make it a prerequisite for our investment.

On every transaction, we will aim to bring in someone from our network of industry experts as a non-executive chair to support and guide the management team. Depending on the situation and what the company needs, we could also put in plans to make changes in the finance function or IT function, as an example.

There will always be an upfront discussion about that and why we believe it is necessary. We want to explain where we see gaps and then help management by introducing them to the right people. We try to make sure that it's always the management team running with this, rather than forcing them into taking our suggestion.

When making a management team change, is it more difficult to find suitable replacements for some roles than others?

Nagler: The industry is generally more comfortable forming a view on the CFO but finds it more difficult to know when to change a COO or even a chief executive.

At Aurelius, we are a little different. We can see quite quickly if the sales function or supply chain are not delivering and if the business has outgrown an individual in an operational or commercial role.

I think the question that you have to ask is: what do you risk losing if you swap out a senior executive? Is it such a special role that only one in a million people can do it? Possibly, but probably not. If a sales pipeline isn’t being delivered in the first place and you make a change that doesn’t work, then you are still no worse off than you were to start with. You have to have the confidence to take the leap.

George: I mainly place chief commercial officers, chief marketing officers and candidates in similar roles. There can be an overreliance on the CFO in the private equity industry. There is a tendency to ask everything of the CFO, but one person can’t know everything.

To answer the question on what roles are more difficult to fill, right now it is very difficult to hire good salespeople, especially in certain geographies, most notably the US and Germany.

Barbour: As a software investor, the chief technology officer (CTO) is a big hire for us. We get involved in that and it can be really complicated. The technology development world is massively broad and often the CTO will be paid more than anyone else and not necessarily motivated by equity.

So, you've got all these factors to take into account and if you get the CTO hire wrong, you're in trouble because you don’t have a product roadmap. Everyone will also be aware of the talent squeeze in that space. It's a tough area to recruit in.

Finally, as we move into 2023, I wanted to ask everyone about plans for deals, portfolios, management teams and recruitment during the next 12 months?

Gilbert: There will be opportunities in the year ahead and you have to be on the front foot to take them. Looking after the portfolio will be important but we want to do deals and not move completely ‘risk off’.

When it comes to the portfolio, I do expect to spend more time on portfolio management. People will be under pressure and we will be there to provide support and make changes if that's required. So, very much what we would normally do but probably with a little more urgency.

George: We are definitely keen to keep investing next year and will be on the lookout for opportunity. The key to investing well will be to intensify due diligence and make sure that any issues are identified really early on, so that a good value-creation plan is in place and can be executed quickly.

Nagler: As a special situations investor, there is a lot of opportunity and the investment team is going to be busy.

On the portfolio side, there will be more time dealing with lenders and other external stakeholders, and the focus will be on backing up portfolio companies in those situations. We have already been bolstering the internal resource available to support the portfolio. We have a very large value-creation division of about 100 people working across our 34 portfolio companies. There is huge capacity to help troubleshoot and support the portfolio through uncertainty.

Slatter: We are focused on special situations and we absolutely expect to see good opportunities to look at over the next year. But we are just going to have to be very careful about where we spend our time, what we focus on and how we're conducting diligence, because in a high-inflation environment, businesses are harder to assess.

With the portfolio, we will continue to support companies and work with them through this challenging period. We've got to make sure we are keeping businesses on track for exit in a timely fashion.

Lampkin: In a very volatile and uncertain period, the reality is that FDs are going to be extremely exposed and the first to come under scrutiny. There are some exceptional individuals out there who always do well but there will be a revolving door. It is bittersweet but will keep us busy.

Another theme that we have noticed, and that is likely to persist, are counter-offers. Candidates are receiving generous counter-offers and deciding to stay put. It has been a real issue when trying to move people and, for me, it is a strange one. Are you really valued if it takes handing in your notice to get a bigger equity stake or a payrise? The interesting thing is that more than 80% of candidates end up moving on within six months of accepting the counter-offer anyway.

Barbour: On the deal side, we've been really busy because we raised a new fund at the beginning of 2022. We've done four platform investments and revenue growth across the portfolio has been good.

It is also going to be a good time to hire. Some of the big tech players have let a lot of people go and we think we can pick up some exciting individuals. In terms of risk, rising inflation hits us in wages, and wage inflation will be the thing we have to keep a close eye on.

Carradice: We always spend a lot of time making sure that forecasts and budgets are robust, but I think in the current macroeconomic climate we are acutely aware that we probably haven't seen the worst of it yet. So really, it’s about providing any assistance to the management team that we can in the most efficient way. We've got quite a big specialist group to offer that support and we can provide help across most key areas of the business.

Management teams generally see this interaction as an opportunity to really professionalise their back-office functions. They want to be agile so that they can benefit from the opportunities that are going to arise in the short term.

Polunina: On the deal front, things keep going and the investment team is very busy. On the portfolio side, we are already looking at budgets and contemplating different strategies if forecasts do not look promising.

This includes decisions about recruitment and support that our portfolio companies require across their commercial functions, operational functions and the finance department.

Sibal: For sponsors who want to swap out senior management, time to hire is a critical factor. On commencement of a new mandate, our first and most productive step in the search process is to reach out to our networks, which have been developed over the past 20 years. While this will generate a shortlist in double-quick time, with candidates often on a six-month notice period, even with a swift selection process, it can be nine months to onboarding. This is often a reason that many of our clients opt to engage with an experienced interim to bridge the gap and deliver some of the time-critical (and unpopular) projects.

Cobbold: One thing we are putting even more focus on is value-creation planning. If there are any gaps within a value-creation plan, we want to give the management team the extra resource to fill those gaps. Even in these times when cash is tighter and there may be more resistance to investing in external support to deliver on strategic growth plans, we want to make sure that companies aren’t slipping into a defensive shell.

Hammond: We all face a challenging 18 months that will create tough circumstances for all of our portfolio companies. The priority is to avoid unpleasant surprises. We just have to stay close to the portfolio and communicate more actively and directly.

You do not want things to land on your doorstep that you are not anticipating. There will always be difficulties. Key customers may change strategy, for example. The communication process is the most important thing to keep on top of, so that we are prepared to deal with the challenges, because they are more likely than ever.