How Portfolio Company CFOs Can Drive Value
in 2023

A year of transition, uncertainty and opportunity.

Last year was a volatile one for private equity firms, but in terms of fundraising, it was also a big one:  $727.3 billion of capital raised. But while it was not as big as 2021, the largest fundraising year on record, firms are eyeing their large stores of dry powder and anxious to put them to work in 2023. But as the Rolling Stones so aptly put it, you can’t always get what you want. Macro uncertainty, volatility, a reduced level of traditional bank financing with elevated rates, and lingering concerns around the stability of the banking system and tech sector post SVB collapse have diminished M&A and private investment deal activity, but it won’t be doom and gloom all year.

Near-term economic choppiness is expected to give way to a resurgence in M&A activity in Q3. And with limited deal activity in the interim as they wait for calmer waters, sponsors are scrutinizing portfolio company performance more than ever.

Portfolio chief financial officers shouldn’t shy away from this pressure, but instead realize that they can be true changemakers who drive value creation for private equity owners in 2023. Here are three ways they can give PE owners a little satisfaction.

Bring stability to exhausted management teams

Recent times have been tough and have worn down management teams. It seems like everything has been upended: supply chains, consumer sentiment, how/where we work, how companies and customers interact. It’s therefore no surprise that burnt out senior managers are retiring or transitioning into other roles – a trend continuing in 2023.

As senior executives are departing companies, CFOs can step in to provide stability and continuity. CFOs are increasingly tasked with managing everything from measuring the financial performance of a business to supporting other management functions including risk management. Central to PE ownership, though, is the positive role CFOs can play in scaling their business’ growth and serving as mission-critical liaisons between different business units, as well as the sponsor itself.

In short, CFOs can be a steady, reassuring hand to management teams in flux and can build or rebuild the foundational elements of proper financial reporting, controls, risk management, and related processes.

Support transformation

Businesses may have undergone restructuring to address strained liquidity positions post covid-19, but fending off immediate cash flow crises is only the first step. They also need to pivot and develop longer-term strategic plans that identify underlying performance issues as well as implement financial, operational and strategic improvements.

CFOs need to work closely with senior management to implement transformative changes that improve EBITDA, trim the fat, and deliver real value for stakeholders. This is where artificial intelligence and machine learning technology tools can help change the game.

As an example, leading consumer packaged goods and retail companies utilize advanced planning tools such as E2Open and Blue Yonder to predict and meet customer demand more accurately, learn from multiple market drivers in real-time, enable efficient management of product inventory levels and optimize net working capital tied up in inventory.

CFOs should not only be familiar with the impact of AI and ML-driven tools but need to embrace their power and be champions of AI/ML-driven transformation if they want their organizations to compete.

Prepare for tomorrow’s IPOs and today’s unique opportunities

CFOs of private companies should do the hard work of IPO-readiness now to best prepare for future opportunities to go public. This checklist includes upgrading audit standards, building out an IPO roadmap (even if tentative), and securing a reputable, independent audit firm.

The truly transformative power of technology shouldn’t be underestimated here, and companies need to invest in appropriate corporate performance management and business intelligence tools to improve near- and longer-term financial forecasting, measure performance, consolidate results and analyze operational data and insights. All companies can benefit from this level of self-scrutiny regardless of whether they go public or simply continue to scale as a private business.

But even when there are no deals, there are still deals, and PE firms are “leaning in” to capitalize on unique investment opportunities, including structuring carve-outs from over-leveraged companies, add-on acquisitions at lower valuations (although rates are making this strategy slightly less attractive now), and deals structured as all-equity to bypass traditional syndicated bank loans where financing remains tight. CFOs will be go-to liaisons as firms evaluate opportunities and make plans for execution.

We’re not out of the woods yet though as 2023 surely has many more surprises in store (who could have predicted everything 2022 would bring?) – so PE portfolio company CFOs must work closely with their sponsors and their own finance departments to make the short-term course corrections that support long-term value creation, while nimbly taking advantage of good growth opportunities when they arise.