Good PE-backed CFOs hit their yearly numbers. Great ones think beyond them—focusing on the next exit from day one. The difference? A relentless commitment to driving long-term equity value even at the cost of short-term gains.
The data shows, however, that CFOs and sponsors may be misaligned on this point. In a recent Accordion survey of 100 PE-backed CFOs and 100 sponsors revealed that most CFOs prioritize yearly performance over equity value, believing that’s what sponsors want. However, two-thirds of sponsors prefer their portfolio CFOs to focus on maximizing equity value—even at the expense of short-term performance.
As we are, respectively, a PE-backed CFO and PE partners, we get it: no CFO—especially one under first-time institutional ownership—wants to feel off-track. Here’s how a CFO can leap from good to great by sharpening their focus on driving long-term equity value.
Two Questions
Great CFOs understand that driving value creation is essential for a successful exit. For others, it requires a shift in mindset: from thinking about the job in one-year increments to adopting a long-term perspective aligned with the typical private equity hold period of four to five years. Early on in their tenure, a great CFO will ask (and answer) two critical questions:
- The equity value when my PE firm invested was X; we need to get it to Y at exit. What can I do to get us there? Sponsors will measure CFO success by their ability to meet the value creation target for exit as quickly as possible. That will often mean trading short-term profitability for long-term gains. And it will almost always mean getting comfortable spending significant amounts of money.
- Which investments will most effectively drive equity value during the hold period? Effective CFOs act on equity-driving investments when prompted by their sponsor. Great CFOs are proactive, identifying and championing those equity-driving initiatives they believe will move the needle (organically or through M&A) and pushing their sponsor to prioritize them.
Investing Not Cutting
Spending money might seem heretical to a CFO who lives by cost optimization and revels in the magic of a balanced budget. But PE-backed CFOs must remember they’re a different breed. Their job is to make investments with a high ROI and pay returns by the time of exit (not necessarily year-end). They must spend money to make money. Such spending initiatives could include:
Investing early in leadership talent. Good CFOs encourage hiring expensive senior team members over time, being careful not to take too much of a cost hit in any year. Great PE-backed CFOs know they can’t afford to sacrifice years of a unified leadership team. Instead, they take an equity-focused approach to talent, investing early in building their senior leadership team. More broadly, they consider hiring throughout the company an early investment to scale to eventual capacity. It involves a steeper upfront cost that may sacrifice in-year profitability, but it drives equity value and pays off in accelerating performance when exit-ready.
Creating the tech and data infrastructure for scale. Many portfolio companies lack the foundation for scaling. Moreover, acquisitive companies tend to have disparate systems, causing data silos, inefficiencies and unreliable information that prevent timely and informed business decision-making. A good CFO might overlay cheap BI stopgaps, allowing the system to function while short-term targets are met. But that won’t drive value at the exit.
Great CFOs identify the business’s unique technology needs and implement the holistic ERP/infrastructure system to meet them, understanding that an optimal tech stack is, in fact, a value-driving investment. On the data and analytics side, they spend the money to get their data house in order, knowing that clean, actionable data underpins all equity-driving strategies. Great CFOs also spend money exploring emerging technologies (like AI) to ensure the company doesn’t cede first-mover advantage to competitors.
Reengineering operations. The new tariffs on imported goods are imminent. Good CFOs will scenario plan and may look for alternative sourcing and manufacturing facilities outside of China and other impacted countries. Great PE-back CFOs do that and more. They see the tariffs as a forcing function and an opportunity to reengineer processes for efficiency and simplification. They will spend money on outside expertise to help find the hidden pockets of value that can be exploited by reengineering operational levers. They (rightly) see it as a strategic equity value investment that will pay for itself by amplifying returns at exit.
Taking a proactive approach to acquisitive growth. An equity value-focused M&A strategy requires identifying targets that may not be operating at the acquirer’s current levels of profitability or growth but have the potential to generate significant value over time. And a great CFO doesn’t just focus on financial growth—they plan for hiring and integration strategies, ensuring the talent is in place early to integrate systems and scale new assets effectively to reap the acquisition’s future benefits and synergies.
Motivating the CFO
Going from good to great requires work from the CFO and sponsor.
The sponsor. Smart sponsors won’t just provide their CFOs with a permission structure to think about long-term equity value at the cost of year-end profitability—they will give them an incentive structure that motivates them to do so.
That starts with compensation. Too often, sponsors tie compensation or cash bonuses solely to year-end performance metrics, incentivizing behaviors that lead to short-term gains. Instead, sponsors should tie at least some of CFO compensation to equity value growth with a framework reflecting the importance of long-term investments. A well-designed bonus structure might include significant weighting for in-year company performance, equity value growth and individual objectives.
Beyond that, sponsors should align with CFOs on treating equity-value-enhancing expenses (e.g., leadership, IT or operations enhancements). In some cases, these investments can even be tracked and measured separately from core company performance. Sponsors and management teams must be in lockstep to ensure that investments aren’t perceived to have an unintended impact on the CFO’s (or other management team members’) performance metrics.
The CFO. CFOs can’t spend money with the vague promise of driving equity value. They must show sponsors a business case in advance and prove it to them after—and that means establishing tools and metrics that measure ROI. By presenting projections, tracking performance levels and improving reporting speed, CFOs ensure their sponsors know the investments are paying off.
Part of thinking long-term is looking at the granular day-to-day—a simple piece of advice, but it works. Smart PE-backed CFOs look at their daily calendar. If most meetings and calls deal with tasks not associated with driving equity value, they spend their time on the wrong things. Changing day-to-day focus often means declining unnecessary meetings and delegating; for example, assigning a budgeting workflow task to a team member and double down on a strategy session with investors.
Good PE-backed CFOs watch the bottom line; great CFOs look beyond it, investing money where it counts: driving equity value.
