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 doesn’t lie: CFOs and sponsors are misaligned. In a recent survey of 100 PE-backed CFOs and 100 sponsors, most CFOs said they prioritize yearly performance over equity value, believing that’s what their sponsors want. But the reality is that two-thirds of sponsors prefer that their portfolio CFOs focus on maximizing equity value—even at the expense of short-term performance.
As a PE partner and a PE-backed CFO, we get it: no CFO—especially one under first-time institutional ownership—wants to feel off-track. But sustainable business success—and a CFO’s leap from good to great—demands a sharper focus on driving long-term equity value.
A tale of two questions:
This is particularly true in today’s more limited multiples environment, in which great CFOs understand that driving value creation will be essential for a successful exit. This requires a shift in mindset: from thinking about the job in one-year increments to adopting a longer-term perspective, aligned with the typical private equity hold period of 4-5 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? The role of the PE-backed CFO is more complex than ever. But at the end of the day, 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?
Good 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 really move the needle (organically or through M&A), and pushing their sponsor to align with and prioritize them.
Spending money might seem heretical to a CFO who lives by a cost optimization mantra 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 the investments that will have a high ROI and pay returns by exit (not necessarily year-end). They must spend money to make money, on initiatives including:
- Investing early in right 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 one 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 in its entirety. More broadly, they look at hiring throughout the company as an important early investment to scale to eventual capacity. It’s a steeper upfront cost—and one that may sacrifice in year-profitability—but it’s one that drives equity value and pays off in accelerating performance at exit-readiness.
- Creating the right tech and data infrastructure for scale: Many portfolio companies lack the right data and technology 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, enabling the system to function while year-end targets are met. But that won’t drive value at exit. On the tech side, great CFOs identify the business’ unique technology needs and implement the right holistic ERP/infrastructure system to meet them, understanding that an optimal tech stack is, in fact, an equity-driving investment. On the Data and analytics (D&A) side, they spend the money to get their data house in order, knowing that clean, actionable data is the foundation on which all equity-driving strategies are built. Great CFOs also spend money exploring emerging technologies (like AI) to ensure their company doesn’t cede first-mover advantage to competitors.
- Re-engineering operations: The tariffs are here. 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 look at the tariffs as a forcing function and an opportunity to reengineer processes for efficiency and simplification. The best PE-backed CFOs 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 that as a strategic equity value investment that will pay for itself by amplifying returns at exit.
- Taking a proactive approach to acquisitive growth: Successful acquisitive growth doesn’t happen by chance. A true equity value-focused M&A strategy requires CFOs to identify those targets that may not be operating at your 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 their hiring and integration strategies ahead, ensuring the right talent is in place early to integrate systems and scale new assets effectively to reap benefits and synergies down the road.
A story of stakeholder success drivers:
Going from good to great requires work on both the CFO’s and sponsor’s part:
- Sponsors: CFOs will not spend money unless they believe they have permission from their sponsor to do so. 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. In too many cases, sponsors tie compensation or cash bonuses solely to year-end performance metrics, which incentivizes behaviors centered on short-term gains. Instead, sponsors should tie at least some of CFO compensation to equity value growth, with a framework that reflects 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 the treatment of 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 member’s) performance metrics.
- CFOs: Of course, CFOs can’t just 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, improving reporting speed, etc., CFOs ensure their sponsors know that their investments are tangibly paying off.
Part of rethinking the long-term is also looking at the granular day-to-day. It may seem like a simple piece of advice—but it works. Smart PE-backed CFOs look at their daily calendar. If most meetings and calls are around tasks not associated with driving equity value, then they’re spending their time on the wrong things. So, that often means declining unnecessary meetings and delegating (for example: delegating a budgeting workflow task to 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 really counts: driving equity value.