Finance directors and chief financial officers of private equity-backed companies have a “significantly shorter tenure” than their counterparts at listed companies, according to research by recruitment firm Edward Drummond.
The research revealed finance directors at the 100 largest private equity backed companies (by turnover) had an average tenure of 3 years and 11 months, 17 percent less than the average of 4 years and 9 months for finance directors at FTSE 100 listed companies.
The changing of senior portfolio company personnel highlights private equity’s claims of adding operational expertise. Terra Firma’s chairman and chief investment officer Guy Hands told delegates at the 2014 PEI Operating Partners Forum in London back in May that he has changed CFOs 31 out of 33 times.
“And we haven’t been afraid to do this once or twice in a company. Everybody in this business wants to hire a top-quartile management. How many people can get that right more than 50 percent of the time? You have to have the courage to realise that you got it wrong and then have the guts to get rid of them in the first three months.”
A private equity-backed CFO will also face heightened pressure if the firm looks to float the company on a stock exchange, Neill Fry, director at Edward Drummond, said. “The approach of an IPO can create additional pressures and requires a very specific skill set from the finance director. Sometimes preparation for an IPO will mean a change of CFO if it is felt that is what is needed to gain acceptance from institution investors.”
However, CFOs that last the course can expect to be handsomely rewarded. “A finance director that takes a company from buyout to IPO will normally see the value of their shares hit the level at which they can very comfortably retire,” Fry said.
Fry added that many finance executives thrive in the target-focused private equity environment and many find it so appealing that they spend the rest of their careers only working for private equity-backed companies.