Today, private equity firms find that the market is demanding relatively high multiples for those companies “in play.” For those companies that can demonstrate reasonably consistent and fairly sizable patterns of cash flow generation, private equity (PE) firms are finding they need to offer EBITDA multiples in the upper single digits to low double digits range.
Once multiples in that range are paid for a portfolio company, that company must perform at significantly high levels for the private equity firm to meet its return expectations.
For companies that have been in the private equity firm’s portfolio for several years and are underperforming, bringing in a project-based CFO may be a cost-effective way to bring about sustainable improvements in cash flows and create value. What are the ways a project-based CFO can help when a portfolio company is underperforming?
1. Provide a Fresh Set of Experienced, Professional Eyes:
Particularly in small- to mid-size private equity firms, it’s likely there has been little direct involvement with the portfolio company. Regular conference calls to discuss performance occur, but extended “deep dives” into the company’s issues are rare occurrences. Engaging an experienced project-based CFO who is used to quickly building relationships and trust with the PE firm and the company can generate almost immediate improvements in performance and reporting.
2. Give Meaningful, Quick Performance Improvements:
The project-based CFO can quickly recognize financial or operational problems because he or she will immediately immerse themselves in the company with the stated goal of helping it perform better—something the company’s management and the PE firm can agree upon. The project-based CFO will bring time-tested approaches to seek out performance improvements and communication skills that put the management team at ease—while still remaining a change agent.
3. Assume the Role of the Facilitator:
If performance has fallen short of expectations during the year or so after the initial investment, perceptions about the root cause of company’s problems are likely to color the view of the PE firm. It may appear from afar that certain improvement levers are the ones that must be pulled to “fix” the company’s problems. Because of the project-based CFO’s deep dive into the company and his or her experience, those perceptions can quickly be validated (and then acted upon with confidence) or destroyed. Either way, the project-based CFO gets the “noise” out of the system and allows both the PE firm and the company’s management to spend their time eliminating the real obstacles that get in the way of improved performance.
Are there portfolio companies at your private equity firm that could benefit from a project-based CFO?