Simon has been the CFO for a number of businesses and has worked with a broad range of Private Equity houses, including 3i, Milestone, Primary Capital, ECI Partners and Babson Capital.
He shares some insights into the role and required skills of a CFO in a Private Equity backed business; the opportunities and pitfalls and how to deal with the stakeholders in a geared business.
1) What attracted you to being involved with Private Equity?
My late father had been in business and so when I left Price Waterhouse I had a great desire to be entrepreneurial.
Private Equity investment in the UK in the 1980’s was still in its early days and most of my peer-group leavers were joining pre-big-bang merchant banks. I soon learnt that regardless of friendships and business contacts, working on your own could be a very lonely place to be and that the lack of a regular income could create unnecessary pressures.
Following my re-engagement with corporate life I focussed on putting myself in a position where I might at some stage own a “piece of the action” but with the benefit of an income and the company of like-minded business colleagues.
2) What are the key differences between Corporate vs Private Equity ownership from a CFO’s perspective?
There can be many similarities such as high leverage, tight covenants, information hungry investors and brilliant but irrational bosses.
One key difference between a privately operated company (in which management might have or are looking to buy a stake) and a Private Equity funded company is the certainty of intention.
Buying from a private vendor or exiting a privately owned business can be an agonising process that often doesn’t complete; emotions, lifestyle and pillow-talk often drive the decision making process.
With Private Equity you know there is a clear intention to buy or to exit within a reasonable timescale. While it would be naive to think that Private Equity and management are always aligned there tends to be far less time wasting as everyone drives to the next liquidity event.
3) What typically are the things that you have had to focus on in your various roles?
Other than the obvious fundamentals of staff motivation, enhanced reporting etc. the big three are:
- Understanding everything in your balance sheet at all times so there are no surprises, including a tight grasp of all key business drivers and working capital dynamics (cash, cash, cash!)
- Think “exit” with everything you do - how might a potential buyer(s) view the business? Ensure all documentation is up to date and structured, all contracts are signed, instil rigour and financial discipline throughout the business in order to make due diligence a breeze
- Have a fully integrated, detailed and sensitisable financial forecasting model for P&L, BS, CF, tax comps, covenants etc that is updated for reality on a live basis.
4) What examples of bad behaviour have you come across?
Running out of cash in 6 weeks – yes, the forecasting dynamics were that bad!
Also, a lack of understanding of the business dynamics when agreeing covenants with lenders & investors can lead to insufficient headroom, a late realisation thereof and a temptation to play games with the numbers.
In my experience, this has always been a road to nowhere – brutal honesty as soon as you know there’s an issue really is the best policy.
5) How did you deal with the Chairman/Private Equity Investor/Management Team dynamic?
The basis of any such relationships should be openness and trust - all stakeholders should be trying to achieve the same goal.
Managing a Private Equity house’s information demands (which usually increase as a business grows) shouldn’t be a problem if the CFO has their house in order.
However, I have experienced several instances of Private Equity houses insisting on seemingly senseless analysis (often due to a lack of understanding of the business); this is of course annoying but, there again, one can only look in the mirror and ask why they are not better informed in the first place.
Whilst the Chairman is generally a Private Equity appointee who will clearly assist them in protecting their interest, he or she has a valuable role as a sounding board for all board members in the event that the communication of certain important business issues are not being openly debated for any reason.
The Management Team is just that, a team. It is incumbent upon the team to work together for the common purpose and breaking ranks should only be done when openness and trust with other stakeholders is put at risk.
6) What aspects did you enjoy most about being a CFO in a Private Equity backed business?
The variety, the building of a skilled finance team (that makes you more redundant, operationally, as you get closer to exit) and the opportunity to make significant capital gains.
Selling an SME to a large corporate will more often than not result in the elimination of the CFO’s role providing the twin opportunity of going off to find something new and offering up the opportunity to the FC and finance team to develop their career in a larger organisation.
7) What aspects did you least like?
In my experience, the games people play are generally the same in “normal” business as they are in Private Equity backed businesses; however, the major difference is the pressure around acquisition and exit and managing all the internal and external relationships.
The process of acquisition and exit is hard work but exciting and rewarding so long as everyone is properly prepared and motivated. Unfortunately, the pressures of a deal process can highlight stresses in the team and stakeholder relationships and a lack of preparation or understanding can create issues and obstacles along the way. This is all part and parcel of life and can be significantly mitigated by getting good management advisors who can deal with such issues on a less personal basis.
8) What are the key attributes a CFO must have for Private Equity backed business?
A desire to know more about the business than anyone else within 3 months of joining; hideous attention to detail; insisting on talking openly and honestly with all stakeholders; not falling into the trap of playing political games.
9) What are the pitfalls?
There are good and bad Private Equity houses, it is essential to get good advice and flush out an on-market deal (although this might be more problematic if joining an existing investment).
The Private Equity house might kick and scream but so long as your advisor has credibility in the market-place and you are insistent then you are likely to succeed. If you don’t, either your negotiating skills need a review or you need to look out for trouble ahead.
10) What are the opportunities?
There are 3 main ways of getting involved in a Private Equity backed business:
- In situ during an acquisition / secondary buyout;
- Replacing an incumbent;
- Initiating a MBI/ BIMBO with Private Equity house backing.
A management team in situ will always have the most negotiating power with the Private Equity house as the Private Equity house requires the team’s co-operation in the process.
11) How to get into Private Equity backed business?
Like any other business, CEOs and Private Equity houses prefer candidates with experience of what is ahead of them.
Many CFO’s who are “lucky” enough to find themselves already in a business being subject to a Private Equity deal don’t see it through and are replaced at some point.
This of course means that there are often many vacancies to join existing Private Equity portfolio companies and this can be an excellent way of gaining experience within the Private Equity arena, albeit you are usually tied to the pre-existing negotiated Private Equity deal where the management equity may or may not be in the money.
Regardless, the opportunity to develop skills and build a reputation within the Private Equity community should not be taken lightly and the experience gained can often be rolled over into more exciting opportunities at a later date.
12) What do you wish someone would have told you about being a CFO in a PE backed business before your first Private Equity experience?
More deals fall by the wayside than get transacted – this can be particularly true when a private vendor is involved.
Simon Vardigan's Background
Having qualified with PwC (Price Waterhouse in 1985) Simon’s first career move was to throw it all in and try something on his own. After realising that this maybe wasn’t the best move, as the economy moved from boom to bust, he re-engaged with corporate life in property and IT based businesses before experiencing the first pangs of a buy-out during an abortive MBO of House of Fraser in 1993; resultantly, Simon was intricately involved in the refinancing of the HoF / Harrods group, the successful flotation of HoF on the LSE and the subsequent flotation aspirations of Kurt Geiger.
Following a period in Spain with CLC Group (a holiday ownership business), in 2000 Simon (as prospective CEO) raised interest from 3i and Barclays to acquire another business in the sector as the basis of a buy and build strategy. The acquisition didn’t complete and Simon returned to the UK and undertook interim FD work at Jigsaw Group (a 3i backed chain of Children’s Nurseries) and worked on the set-up of a Primary Capital backed lottery business.
With the stripes of Private Equity experience now fully earned he was appointed FD of ECI backed premium tour operator, Kirker Travel in 2002. Following the successful sale of Kirker to Kuoni in 2007 he joined as FD of Coffee Nation, a Primary Capital backed gourmet coffee vending business, in order to progress an exit. Following a secondary buy-out in 2008 backed by Milestone Capital and Investec, Coffee Nation was sold to Whitbread (Costa Coffee) in 2011. Simon then worked for the Opco/PropCo pub group, Barracuda, controlled by Babson and its banks and subsequently spent time as CEO of Heston Blumenthal’s Fat Duck Group.
Simon is currently a Partner in Isfield Investments LLP, a private fund that made its first investment, into the education sector, in March 2014.