January Private Equity CEO/CFO Report

Sponsored by PE-Xcelerate.com

The Private Equity Story

The exit pressure continues to build as PE firms look to generate liquidity for their LPs and a global record of dry powder sits on the sidelines.

Market forces are moving in the right direction:

• The IPO market is showing signs of breaking. Last month Nasdaq CEO Adena Friedman told Barron's that 85 companies have confidentially filed to go public. Additionally, Law Firms and Consultancies that serve the market are currently being engaged at high levels."It's a question of who wants to go first" said one #CFO I work with. If the IPO damn breaks that exit optionality would ripple through the investment community, unlocking what has been a "WD-40 Company proof" stuck system.
• Seller capitulation is definitely happening in pockets on the VC side (in some cases fire sales) and buyer seller price-mismatch is slowly coming into alignment on the PE side.
• Fed clarity on interest rates coupled with more financing options (private credit capacity has increased substantially) will create momentum for deal-making.

While I haven't seen hard numbers, in following the major PE Firms (I get their announcements), I've seen a substantial increase in announcements in '24 vs. '23. We'll see if that's validated in the data.

The CFO Story

Demand for A-player CFOs has not slowed and likely won't in the near future. The role continues to evolve (see below.) PE firms continue to believe that their portfolio CFOs should be operating at a higher level and are investing to upskill portco talent generally as hold times extend.

Meanwhile CFOs have pivoted from defense to cautious offense, focusing on disciplined growth and building high-functioning organizations vs. the pour gas on the fire mentality of 2021. This requires CFOs to become more strategic and operationally focused. Many CFOs privately say they (and their organizations) have benefited from the malaise of 2023 in that they were able to use the year to refocus resources and strategically position their portcos. We're holding a LinkedIn Live session this Wednesday for The Meta-Profile of Performance Leader CFOs if you'd like to join, click here: https://www.dhirubhai.net/events/themeta-profileofperformancelea7159260614454874112/comments/

Enjoy reading this CEO heavy collection of data, stories and resources for JANUARY. Please DM with typos/errors.

WHAT MID-MARKET CFOS ARE THINKING

According to BDO's CFO survey, CFOs are tempering their expectations for growth in 2024. A significant portion now anticipate flat or reduced revenues and profitability, marking a shift towards more cautious optimism compared to last year; they are actively seeking ways to build resilience and foster growth within their organizations. CFOs are closely monitoring risks, particularly those related to economic volatility and the evolving landscape of generative AI and data privacy. A significant number are planning to deepen their involvement in digital transformation as a means to bolster efficiency and mitigate costs.

Workforce engagement remains a critical focus, with CFOs planning to enhance compensation, benefits, and expand their teams.

Sustainability is also a key area of strategic investment, with a notable increase in companies integrating ESG principles into their core business strategies, viewing it as a pathway to resilience. The adoption of generative AI is seen as a game-changer, with companies actively developing policies to harness its potential across various aspects of their operations, from compliance to customer service, indicating a broad and optimistic outlook towards leveraging technology for future readiness.

"It's a game-changer" - PE Operating Partner

We are holding spots for our 5-week virtual PE CFO Accelerator course for Q2 as well as our upcoming CHRO Accelerator. https://tinyurl.com/yc6fnnv7 And if you're looking for a PE Mentor or would like to be one, drop us a note: https://www.pexcelerate.com/

PRIVATE EQUITY LOOKING TO DRIVE GROWTH

According to Pitchbook's PE Breakdown, PE strategy has shifted towards growing portfolio companies for longer periods due to higher interest rates, resulting in increased hold times.

While there are challenges such as upcoming fund and loan maturities and the risk of not covering debt expenses due to high base rates, there's potential for recovery in 2024, driven by higher public trading multiples that could stimulate M&A activity and improve exit prospects, contingent on a resurgence in exit activity.

HOW MUCH IS A PE CFO WORTH IN IMPACT?

In this very unscientific poll, a lot. Taking into account:

?? Timeline Impact ?? Multiple Impact ?? Performance Impact ?? Avoided Direct Turnover Cost: $1-2 Million (severance, equity, new placement fees) ?? Avoided Indirect Turnover Cost (missed productivity, distraction, cleanup, rehire onboarding)

The vote is still open for a few more days: https://tinyurl.com/mrywsr6e

THE CFO AS THE COO

Qualcomm has announced that Akash Palkhiwala, the company's CFO, will immediately assume an expanded role that combines his finance chief duties with those of the chief operating officer. Palkhiwala will not only manage Qualcomm's financial operations but also take charge of its global go-to-market organization, operations, and IT department.

As I've argued many times before, the CFO in many companies is the defacto COO. The importance of numbers, unbiased perspective and enterprise-wide view equip the right CFO to perform well in this role. Here's what's behind the trend:

1. Broader Responsibilities: CFOs are increasingly expected to take on a wider range of responsibilities beyond traditional finance roles, including operational, strategic, and technological aspects of their companies.
2. Strategic Leadership: The merging of CFO and COO roles underscores the strategic importance of finance leaders in guiding company operations, decision-making, and long-term planning.
3. Versatility and Adaptability: The trend highlights the need for CFOs to be versatile and adaptable, capable of managing diverse aspects of the business, from financial planning and analysis to overseeing IT and global operations.
4. Enhanced Career Pathways: The dual role creates new career pathways for finance professionals, broadening the scope for CFOs to step into top executive positions, including CEO roles, by gaining a comprehensive understanding of the business.
5. Skillset Expansion: CFOs must expand their skillsets to include deep operational knowledge, technological savviness, and strategic insight, reflecting the evolving nature of the finance chief’s role.
6. Leadership in Innovation: As companies, like Qualcomm, navigate new technological frontiers like generative AI, CFOs are at the forefront of driving innovation, managing investments in new technologies, and ensuring that financial strategies align with technological advancements.
7. Increased Collaboration: The role expansion encourages closer collaboration between different departments, requiring CFOs to work seamlessly with teams across the organization to drive operational efficiency and business growth.

WHAT MAKES A GREAT COO?

A natural question for a CFO might be: what makes for a great COO? Russell Reynolds Associates has you covered with their COO characteristics: pragmatism, collaboration, learning, drive, creativity, and service orientation.

CFO TO CEO IS TRENDING... SLOWLY

This trend continues to align with the overall trend of CFOs ascending to the CEO role. Crist Kolder's volatility report show's that a record 8.2 % of CEOs were former CEOs in the S&P 500.

Other findings:

• External hiring of both CEOs and CFOs is on the rise
• Step up candidates are appointed to CFO seats three to one over external sitting CFOs
• PwC and Goldman Sachs lead the charge among CFOs with public accounting and investment banking backgrounds
• The percentage of female CFOs has nearly doubled over the past decade Ethnic and Racial diversity among CFOs has more than tripled in the past decade
• Business degrees are more prominent among CFOs, while Engineering and Business degrees are more prominent among CEOs
• A decreasing number of CFOs have neither an MBA nor a CPA

THE TEN ESSENTIALS OF PE ALPHA

McKinsey highlighted the 10 essentials of PE CEO alpha - capabilities that separate the best from the rest.

HOW TO BE A GREAT CEO AND... DO YOU REALLY WANT TO BE A CEO?

McKinsey (again) has a insightful view on both the motivation to be a CEO and what makes for a great CEO.

And finally, what CEOs need to be great at:

1. Setting the Direction: Establishing a clear and inspiring vision for the future of the organization.
2. Aligning the Organization: Ensuring that the company's structure, culture, and resources are organized to effectively pursue strategic goals.
3. Mobilizing through Leaders: Empowering and leveraging the talents of leaders within the organization to execute the strategy.
4. Engaging the Board: Building a productive and supportive relationship with the board of directors to guide and support the organization's direction.
5. Connecting with Stakeholders: Effectively managing relationships with all key stakeholders to garner support and alignment with the company's objectives.
6. Managing Personal Effectiveness: Prioritizing self-management to maintain resilience, focus, and a balance between professional and personal life.

8 PRIORITIES FOR CEOS (and therefore CFOs)

And finally, another McKinsey highlight, their 8 priorities for CEOs.

1. Scale, use and adapt to AI
2. To outcompete using technology, companies must fundamentally rewire organizationally to fully leverage digital and AI transformations.
3. Adapt to the energy transition which represents the largest capital reallocation of our lifetime, necessitating significant investment in green technology amidst growing environmental concerns and investment hesitancy.
4. Identifying and nurturing a company's unique superpower, like Toyota's production system or Disney's imaginative experiences, is crucial for standing out and achieving market outperformance.
5. Companies should value their middle managers as core assets, recognizing their critical role in operational success, as exemplified by Waffle House's management philosophy.
6. In an unpredictable geopolitical landscape, companies must prepare for unexpected events (black swans and gray rhinos) to build resilience against unforeseen global shifts.
7. Growth strategies for CEOs in 2024 include focusing on core strengths with technology, improving sales productivity, and continuous strategic acquisitions, following the ten rules of growth.
8. CEOs should embrace scenario planning and invest strategically during downturns, considering shifts in global assets and the move from banking systems to private markets.