The Best Private Equity, VC & CFO Insights for August 2023

The Best Private Equity, VC & CFO Insights for August 2023

The Private Equity Story

Private Equity is pivoting for profit and time while the markets await economic and interest rate certainty. The same themes largely hold: stockpiles of dry powder, flight to quality with select bargain hunting, buyer-seller price mismatch is still a problem though there is some movement and fundraising is still low with private credit and secondaries seeing more of the action.

The CFO Story

The dearth of private equity CFOs who have experience, are available and want to stay in the game has led to a marked uptick in new to role CFOs or new to PE CFOs. A portion of those CFOs will be flushed out in the first two years, another chunk will struggle and the one's that succeed will be in high demand.

Enjoy reading the collection of data, stories and resources for AUGUST. Please DM with typos/errors. Bermuda is pictured above.

  1. PRIVATE EQUITY ADJUSTS TO NEW REALITY
  2. PRIVATE BOARDS ARE SLOW TO RESPOND
  3. GREEN SHOOTS, PRIVATE DEBT AND SECONDARIES
  4. CEOs SEE A NEED TO EVOLVE
  5. IS THE GOLDEN AGE OF PE BUYOUTS OVER?
  6. WHAT FINANCE WANTS
  7. THE MOST ACTIVE INVESTORS IN Q2
  8. HOW A PRIVATE EQUITY CFO SUCCEEDS

(See July's Edition Here )

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1. PRIVATE EQUITY ADJUSTS TO NEW REALITY


The Private Equity Wire Insight Report highlighted four topics of not from the first half of 2023:

  1. Bullishness: 81% of investors plan to keep or increase their investment over the next 12 months. 56% plan to increase their allocation to private credit.
  2. Liquidity: Private Equity is deleveraging through the secondaries markets.
  3. Back to Building: There is a renewed focus on value creation and Private Equity firms are increasing their capability to provide support and leveraging tech.
  4. PE > Economy: 87% of investors are confident in the growth prospects for private equity vs. 59% who are confident in the global economy.

Other notes:

  • Major PE firms offer reduced fees to select LPs.
  • Adaptation to market opportunities like bolt-ons, carveouts, and private credit increases PE success likelihood.

2. PRIVATE BOARDS ARE SLOW TO RESPOND

The NACD's 2023 Private Company Board Practices and Oversight Survey found that overall, private boards are slower to adapt and address new issues vs. their public counterparts on key issues/trends. Here are four issues that stand out.?

  1. 93% of directors believe AI will impact their business, only 7% believe their management teams are extremely proficient on AI.
  2. 55% of private company respondents believe that ESG programs create long-term value, only 30 percent believe they've increased ESG as a priority.
  3. 22 percent of private company respondents say that climate-change-related discussions have increased over the past two years.
  4. 28 percent of private company respondents believe that their board has assessed human capital-specific experience and expertise to identify board gaps.

3. GREEN SHOOTS, PRIVATE DEBT AND SECONDARIES

According to Pitchbook, the GP stake and M&A action in the alternative manager space have caught up to 2022 levels (control transactions are making up a hefty 45% of these deals.) The top-seven US-listed alternative managers showed single digit returns for the first three quarters. PE capital deployment is improving for most of the public PE firms, albeit from low numbers and with creativity. Similarly, fundraising improved over Q1, with private debt funds and secondaries taking a bigger share of raised funds. Debt funds have captured 19.7% of capital raised, while secondaries have doubled their share of funds raised.

4. CEOs SEE A NEED TO EVOLVE


Some high level findings from PwC's CEO survey. 40% of CEOs do not believe their current business models will be viable within a decade. The biggest business drivers are change in customer preference, changes in regulation, labor/skills shortage and technology disruption (note from me: only 49% of CEOs think Technology disrupters will impact profitability to a large extent in the next ten years?). PwC surveyed CEOs identified five broad megatrends—climate change, technological disruption, demographic shifts, a fracturing world and social instability —reshaping the business environment. Specific to AI, they expect productivity to impact by the ability to scale, work faster, reduce costs and enable new business models.


5. IS THE GOLDEN AGE OF PE BUYOUTS OVER?

Apollo Global Management Chief Executive Marc Rowan believes the free-ride in private equity (multiple expansion) is over. ? “In the [private] equity business, this year has really marked the end of an era,” said Rowan and that "PE will be forced to go back to investing in the old-fashioned way" by being "very good investors”.

6. WHAT FINANCE WANTS

Finance professionals are interested in job stability, financial health of the company, leadership commitment, and product relevance. The also want clarity on career paths, use of technology, and their potential impact according to the CFOs that took part in CFO.com 's Peer Audit . CFOs are looking for self-motivated problem solvers and team players.

7. ARES CAPITAL WAS THE WORLD's (AND US's) MOST ACTIVE INVESTOR IN Q2.

8. HOW A PRIVATE EQUITY CFO SUCCEEDS

I fed CHATGPT a summary of my interviews with over two dozen PE CFOs and Operating partners about how to succeed in PE CFO role... here's the interview CHATGPT created:

Can you tell us about the challenges that impact value creation in the PE CFO role?

CFO: When you step into the role of a private equity CFO, time is a critical factor. The main objective is to achieve the investment goals within the expected timeframe. However, there are strategic, operational, and cultural challenges that can hinder value creation, and as a CFO, it's essential to address them early and effectively.

How do you ensure that strategies and operational actions translate into financial performance in a private equity portfolio company?

CFO: The CFO plays a unique role in establishing clarity. It's important to quickly identify the key drivers of the business and understand the challenges related to people, processes, and technology. Fixing the data infrastructure to enable visibility and insightful reporting is crucial. Most importantly, the CFO takes accountability for metrics and promptly addresses any deviations from the expected performance. They analyze different scenarios and provide advice on the best course of action to tackle underlying issues and make informed decisions.

Do CFOs help align the organization to the investment thesis?

CFO: CFOs need to go beyond numbers and spreadsheets to create a compelling narrative. They connect the investment strategy with the financials and distill it into a clear and concise message that resonates emotionally. This conviction helps drive alignment and effort throughout the organization. By helping team members understand how their work impacts value creation, CFOs empower them to make informed decisions every day. They engage leaders, align perspectives, and show how different parts of the company fit together, considering different scenarios aligned with the investment thesis.

How do CFOs earn the respect and trust of the entire team, including frontline leaders, the CEO, and the board?

CFO: Building credibility and trust is crucial for CFOs to be effective. They have to have a deep understanding of the business at every level, from the ground floor to the strategic and investor levels. By actively engaging with various departments, such as product and sales, and experiencing firsthand the operational aspects of the business, CFOs establish themselves as trusted advisors. Encouraging early communication of both challenges and opportunities allows CFOs to inform strategic decisions, mitigate risks, and capitalize on emerging opportunities.

How do CFOs effectively capture and leverage data?

CFO: Data is critical in private equity, and CFOs need to prioritize financial infrastructure to support decision-making. Great CFOs and finance teams are respected across the enterprise not only for their mastery of numbers but also for their business acumen and guidance. They build dedicated data teams, leverage advanced databases, and collaborate with data scientists to measure and predict performance. However, it's important to remember that data must be used in conjunction with influence and leadership. CFOs must turn information into action and ensure their role as a strategic partner is recognized throughout the organization.

How do CFOs navigate challenging cultures within portfolio companies and foster a data-driven operational environment?

CFO: When CFOs enter new roles, they often face cultures that may conflict with the investment goals and timeline. Creating a data-driven operational environment requires cultural transformation, and the CFO plays a crucial role in driving that change. By analyzing and communicating cross-functional data against external trends, CFOs help the organization see beyond immediate challenges and shape a forward-looking business perspective. They focus their team's efforts on proactive decision-making and future-oriented strategies.

How do you drive transformation and growth as a CFO?

CFO: Driving transformation and growth requires reallocating resources and prioritizing areas that drive value. Working closely with the CEO, board, and leadership team, we identify bottlenecks and determine the necessary changes to unlock value. This involves rationalizing unprofitable parts of the business and freeing up resources for high-value initiatives. As CFOs, we foster executive focus, risk management, and experimentation to uncover new opportunities. Collaboration with HR to align objectives and adjust processes is also crucial. We model leadership behaviors and align incentives to drive cultural change and replace legacy behaviors when necessary.

Maintaining alignment among stakeholders is vital. How do you facilitate the progress of the investment cycle and ensure ongoing alignment?

CFO: CFOs play a critical role in maintaining alignment among stakeholders. We work closely with the PE sponsor, leveraging their resources and guidance to determine the most important aspects of the PE playbook for our organization. By leveraging our enterprise-level view and framing abilities, we reinforce our perspective using numbers and storytelling. This helps build credibility and guides the board while energizing the organization. We ensure that the right conversations take place between stakeholders, addressing both short-term and long-term scenarios. This forces us to make hard trade-offs and maintain focus. Ultimately, as CFOs, we act as the north star, translating progress against the investment thesis to all stakeholders involved.

Adapting to changes is crucial in the business world. How do you navigate shifting assumptions and changing strategies?

CFO: Being agile in decision-making is essential because business conditions are constantly changing. As CFOs, we need to flex when the assumptions underlying the investment thesis change. We provide valuable advice to stakeholders on how these changes impact execution. We recognize when the investment time horizon may need adjustment, pivot strategies when necessary, and seize emerging opportunities. The ability to adapt and capitalize on unseen value is crucial for us in the private equity industry.

Lastly, what role do CFOs play in fostering collaboration and constructive tension between CEOs and boards?

CFO: As CFOs, we act as bridges between CEOs and boards, bringing constructive tension to the table. We embrace the partnership with the CEO and the PE firm and ensure effective communication. Managing two reporting lines, we keep both the sponsor and the portfolio company informed. By bringing valuable insights and challenging decisions constructively, we promote healthy discussions between CEOs and boards. This collaborative approach drives the organization forward, aligning vision, strategy, and execution among all stakeholders.

Thanks for reading, please share it if you found it valuable.




John Lozito

Financial Planning & Analysis (FP&A) | Transformation | Decision Support | Value Creation | Strategy | Revenue Management | Operations Finance | Budgeting/Forecasting | Corporate Finance | Beverages | CPG

1 年

Scott Engler I always look forward to these insights. The CEO outlook (#4) seems especially bearish and I wonder how that vision is influencing the managerial posture of P/E CFOs? Great read.

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