CFO's Guide to Private Equity

By Robert Tearle

The polished mahogany boardroom tables where private equity decisions are made mask a complex web of pressures that few portfolio company executives fully grasp.

While CFOs meticulously track operational metrics and value creation initiatives, their PE board members are orchestrating a decade-long dance of fundraising, deployment, and exits across multiple funds.

The reality is that your PE sponsors are likely juggling three distinct timeline pressures at any moment. They're deploying capital from their current fund, preparing exits from their previous fund, and laying groundwork for their next raise. This juggling act shapes board decisions in ways that aren't immediately apparent to portfolio company management teams.

Consider the typical first-time fund. In those crucial initial 18 months, PE firms face the paradoxical challenge of fundraising while simultaneously proving their investment thesis through early deals. These first portfolio companies become more than just investments – they're proof points for attracting additional capital. Late-joining investors might pay a premium to enter the fund, but they want evidence that the strategy works.

The PE fund will have to prepare their pitch, create an investment memorandum and look to be short listed for the investment committee similar to any other company looking for investment. For a smaller fund the pitch is to high net worth individuals which is very relationship focused, the middle sized fund is more towards family offices and the large fund is towards institutional investors. The larger the fund the stricter the mandate and requirements to even be considered for investment.

The pitch comes down to three things:

1. The Market Timing. Why this strategy, why this team, and why now?” It could be a fund looking to focus on IT infrastructure to support growing needs on the back of AI and Cyber security.
2. Internal—our approach. How the fund differentiate from other funds.
3. External—cost, structure, fees. What’s in it for the investors in the fund (high net worth, family office or institutional)?

The evolution of a PE firm's investor base adds another layer of complexity. First-time funds typically rely on high-net-worth individuals and small family offices, who often make quick decisions based on relationships. By Fund III, institutional investors enter the picture, bringing stricter investment criteria (mandates) and more formal processes. This progression can shift board dynamics from entrepreneurial flexibility to institutional rigor.

The pressure to deploy capital within a defined window creates its own peculiar dynamics. PE firms look to fully invest their funds within four to five years, yet rushing into poor deals can damage returns. This tension between deployment speed and investment quality plays out in board discussions about acquisition opportunities and follow-on investments.

By years three to four, PE sponsors are typically raising their next fund while still managing their current portfolio. This dual focus can manifest in board decisions about resource allocation and exit timing. The track record they're building with current portfolio companies directly impacts their ability to raise the next fund.

Management fees of 2% sustain PE operations, but the real returns come from successful exits based on carried interest of 20% goes to the General Partners. But before the carried interest the Limited Partners get their money back plus the preferred interest say 8% and 80% of the profit. This creates an interesting alignment of interests around year seven, when exit preparations begin in earnest. Portfolio company executives often notice increased scrutiny of metrics that will matter to potential buyers, and heightened attention to growth initiatives that could impact exit multiples.

Interest rates cast a long shadow over PE operations. A single percentage point increase ripples through the system, affecting everything from debt service costs to exit multiples. PE boards must balance optimizing current performance with maintaining flexibility for various economic scenarios.

For portfolio company CFOs, understanding these fund-level dynamics provides crucial context for board interactions. When your PE sponsors push for accelerated growth or question follow-on investment timing, they're often managing pressures beyond the immediate performance of your company. They're building track records, managing fund-level metrics, and positioning for future raises.

This doesn't mean portfolio company interests are subordinate to fund considerations. Rather, the best PE firms excel at aligning portfolio company success with fund-level objectives. They recognize that sustainable value creation at the portfolio level drives fund performance, which enables future fundraising.

The most sophisticated PE boards have mastered the art of balancing these competing pressures. They maintain focus on long-term value creation while managing the practical constraints of fund lifecycles and investor expectations. Understanding this balance helps portfolio company executives navigate board dynamics more effectively and position their companies for success within the broader fund strategy.

As markets evolve and PE continues to mature as an asset class, these dynamics grow more complex. The next generation of PE leaders will need to navigate an increasingly institutional landscape while maintaining the operational focus that drives returns. For portfolio company executives, understanding these pressures isn't just about better board relations – it's about contributing more effectively to the overall success of the PE model.

The view from the other side of the boardroom table reveals that PE is not just about financial engineering the areas within the Board's control but also about managing multiple stakeholders across extended time horizons.

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