Everything you need to know about how to make it as a CFO in the private equity space.
The COVID-19 pandemic has triggered a year of economic uncertainty, putting even some of the world’s most notable companies under the magnifying glass. And the implications of the pandemic mean long-term economic challenges will affect many businesses for the foreseeable. This has put immense pressure on chief financial officers (CFOs) to say the least. After all, the CFO must drive a company’s financial planning, perform consistent risk-management initiatives, and lead a company’s investment strategies based on its cash and liquidity risks.
Meanwhile, we live in a world where social media spotlights businesses that suffer financial mismanagement, exposing every economic weakness. Think Tesco, Carillion, Patisserie Valerie, and Enron. Social platforms raise our awareness of which businesses are thriving and which have made major mistakes. And a business’ CFO takes on the responsibility of identifying the appropriate level of risk the business should take. It’s a demanding role that requires a high level of expertise and experience. But how can you make your way up to CFO status? And can you switch from a private limited company (PLC) to a private equity (PE) company?
Here, divisional and group CFO Gary McGaghey shares six insights into how businesses appoint CFOs, how you can jump sectors, and how you can improve your chances of making it as a CFO on the PE scene.
1. External Versus Internal Promotions
McGaghey explains that when it comes to appointing a CFO, most businesses hire an external candidate instead of recruiting internally. This approach allows management teams to select from a larger pool of candidates and opt for a contender who can bring new knowledge and experience to the business. Therefore, many companies appoint a deputy CFO from a larger organisation.
The stats in Eton Bridge Partners’ 2021 CFO Pathways Report echo this way of thinking. The study found that 80.5 percent of CFO appointments from its sample of around 1,000 were external hires (and 75.5 percent of CFOs in listed companies were external hires).
2. Switching From PLC to PE Companies
Many CFOs question whether they can switch from PLC to PE companies. Though it’s possible to make this transition – as McGaghey did when he transitioned from global consumer healthcare product provider Nelson & Co Ltd to the marketing production services group Williams Lea Tag – it’s much easier to switch from PE to PLC.
The Pathways Report shows that only 27 percent of the study’s PE CFOs had no previous PE experience. Therefore, if you’re keen to take on a CFO role for a PE company, it’s often easier to navigate your career into the PE space as early as possible, even if that means taking a lower-ranking job to start with.
Often one needs to take some element of risk and potential “demotion” to make the shift from PLC to PE as there is certainly a perception barrier to break into the PE sector, says McGaghey.[CM1] I decided to move to a Deputy CFO role for a short period to break through this perception barrier, taking the risk that this move had no guarantee of a promotion to the head of the function as Group CFO. Fortunately I was able to quickly demonstrate my ability to operate in the PE environment and thus move up into the Group CFO role but I had to take the personal risk and back myself.
3. Switching Sectors
When a business takes on a new CFO, its senior management team considers candidates’ previous positions, qualifications, and the insights they can bring to the business. However, few companies hire a CFO from a direct competitor. Instead, they’re more likely to look outside their sector to recruit a candidate who can bring fresh insights to the company. According to the Pathways Report, almost 70 percent of new CFOs moved from a different sector when taking on their current roles.
Similarly, McGaghey transferred from the fast-moving consumer goods (FMCG) industry to the marketing industry when he became Williams Lea Tag’s CFO. McGaghey emphasises that, contrary to common misconception, financial expertise is fairly sector-agnostic. That said, many CFOs build up similar sector experience in their early careers before switching industries later. He further emphasises it is really important not to get distracted by the differing dynamics of a new industry. Ultimately the fundamentals of good profitable business growth are the same across all industries. The challenge is to ensure you leverage your core financial and commercial capabilities in this new environment as they are equally applicable. Never listen to people when they say “but it’s different in our business/industry”. It’s not! The translation and execution of a clear strategy to generate profitable growth, utilise resources (including cash) effectively, and create value, is the same across all industries.
4. The ACA Qualification
Most CFOs hold an ACA qualification. The Pathways Report notes that few CFOs hold ACCA or CIMA qualifications, which tend to lead financial experts down alternative career paths. While 46 percent of CFOs in the study held an ACA qualification, 7 percent held a CIMA qualification, and 3 percent held an ACCA qualification.
The blend of the strong technical financial skills in a Chartered Account/ASA qualification, combined with the strong commercial and strategic skills required in a ACCA qualification are really powerful together and equip a CFO to deal with the technical financial demands of a CFO role as well as the business commercial demands of the CFO role,[CM2] says McGaghey, who holds an ACMA certification, bachelor’s degree in Accounting, Auditing, Tax and Finance, and a Non-Executive Director Diploma from the Financial Times.
5. Average Age and the Shift Towards Improved Gender Diversity
The Pathways Report found that the average age of a new CFO in the UK is 49, both in private and listed companies. This is two years younger than the average age of all current CFOs in listed companies and six years younger than the average age of a listed CEO. CFOs in the Pathways Report ranged in age from 30 to 76.
Meanwhile, gender is a widely discussed topic in the business-management space. The Pathways Report concludes that women only make up 17 percent of CFOs appointed over the past two years. This stat matches up with the male-to-female ratio in C-suite positions. However, the number of women in CFO roles is growing. We are seeing a shift towards improved gender diversity, though we still have a long way to go. This challenge to improve gender diversity is equally applicable across both PLC and PE sectors. Mr McGaghey says more needs to be done to address this, including understanding the underlying drivers and having a proactive mindset to address these factors to improve diversity and create a more inclusive work environment.
6. First-Time CFOs
The Pathways Report concludes that 61.5 percent of newly hired CFOs come from previous CFO roles. And 69.9 percent of CFOs who are also group finance directors come from CFO roles, too. It can be difficult to compete for a CFO role if you don’t have experience in this position. However, McGaghey explains that businesses are more likely to hire first-time CFOs who have experience from a group finance position than those who have experience as a divisional finance director. The Pathways Report underpins this, finding that candidates are three times more likely to secure first-time CFO roles if they have experience from a group finance position, rather than a divisional finance position.
Having the rounded financial experiences of a group finance position, which includes controlling, governance and technical expertise skills such as treasury, tax, M&A and Investor relations, is a big advantage when trying to make the set up to a Group CFO role, says McGaghey. Furthermore the accessibility to the board and C suite, provide a further advantage in the area of relationship management and ability to demonstrate one’s capability to step up. Although not always a factor, but the ability to demonstrate one’s cultural diversity through successfully fulfilling a group financial role in a multinational business, is a big advantage.
Becoming a CFO for a Private Equity Company
Hopefully, McGaghey’s insights will give you the information you need to plan your route towards securing a CFO role in the PE arena.
You can learn more about McGaghey’s experience in privately owned, listed, and PE companies on his LinkedIn profile.
About Gary McGaghey
Gary McGaghey has delivered impressive organic and M&A-driven growth for several PLC and PE businesses around the world. Having transformed businesses in FMCG, beverage, pharmacy, and media markets, he has vast sector-specific knowledge and has applied his financial expertise to several industries. As the CFO of the €1.3bn group Williams Lea Tag, McGaghey manages the PE business’ mergers and acquisitions, cost-restructuring programmes, divestitures, carve-outs, and balance-sheet