McKinsey: Private Equity’s Proactive Value Creation Offers Lessons for Public Company CFOs

In a time of growing uncertainty and economic challenges, private equity portfolio company chief financial officers who take a proactive approach to value creation offer valuable lessons that public company CFOs need to take note of, says McKinsey & Company.

Ankur Agrawal, a partner at McKinsey, co-authored a new report laying out some of the lessons private equity portfolio company CFOs have to offer. The new research highlights that from the moment a private equity fund acquires a company, it typically has a five to seven year period for its CFO to create and manage a plan to deliver value, in contrast with the quarterly earnings guidance and annual budget cycles of a publicly-traded company.

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Public company CFOs are well known for pulling back and avoiding risk, but private equity CFOs must take bold steps to deliver the kind of double-digit returns expected by their investors, with McKinsey suggesting that public CFOs should define and spearhead aggressive but achievable targets. Beyond taking more risks, Agrawal recommended that targets have an element of “base” and “stretch,” putting execution front and center and encouraging more entrepreneurial idea generation as well as individual and team ownership. Those stretch goals should not be arbitrary, but rather market-based with a focus on a range of outcomes.

Talent acquisition remains a major concern for private equity finance chiefs as well, with many private equity portfolio companies recognizing the need to put high-performing talent in key roles aligned with the biggest value drivers for the company. Being open to hiring less-tenured talent, providing stretch assignments and cross-functional project-based opportunities, and actively engaging operating partners in financial reporting can help firms develop a healthy talent development culture.

While private equity firms have a history of acting aggressively to reduce costs in pursuit of short term profitability, the current state of the economy is driving both public and private businesses to take steps to prepare for slower growth or better align cost structures. In order to maximize successes in an increasingly uncertain market, Agrawal suggested that adopting an investor mindset can be helpful for all finance chiefs, encouraging them to ask hard questions, redeploy resources, and shape strategy.

With private equity finance executives being willing to make bold moves and re-shape strategy while continuing to deliver value to investors in times of instability and uncertainty, public company CFOs can draw from their demonstrated success to improve their own financial outcomes and long-term profitability.