Careers: private equity

What skills and experience do private equity firms look for in an FD
appointment ­ and who is likely to make the grade? The good news is that there
are plenty of new opportunities being created every day. Almost without fail,
when a private equity firm invests in a business for the first time, they will
need to hire a different kind of finance director.

The FD who has grown up with a privately owned business is unlikely to be
able to respond quickly enough to the extra demands of high gearing.

PE-backed businesses have challenging financial targets to deliver. A typical
deal can take up to six months to complete and it is very normal for management
to have taken their eye off the ball while going through the process. The FD is
therefore critical in re-focusing management to ensure every target is
delivered.

Getting into private equity can be a Catch-22 situation ­ ideally you need to
have PE experience to make the top of a shortlist and, generally, relevant
sector experience. External investors only have a few years to realise their
investment, so although the right FD is critical, the PE house can find long
notice periods a problem ­ immediate availability is therefore a definite
advantage.

PE clients want someone who has been in the number one financial position ­ a
financial controller is not enough ­ and someone who can demonstrate a
‘shirt-sleeves rolled-up’ style of operating. Unless their sector experience is
very strong, someone from a large corporate or PLC background is rarely
considered, particularly if they have had the support of very large teams.

Candidates need to have generated increased cash and profits in their tenure.
Anyone who has seen profitability drop in their time, no matter what the reason,
will almost certainly be discounted. Private equity clients invest in businesses
which they expect to grow ­ a track record of living through growth is
important.

Critically, an FD should have directly managed banking and investor
relationships and be able to handle the critical exit stage. They need to be
calm under pressure and comfortable with banks ­ ideally taking a business
through a tough time, used to daily cash flow pressures and good managers of
working capital. They also need to be good communicators and prepared to
communicate regularly.

They should be able to spot any bad news in advance via good early warning
systems and strong forecasting abilities. These candidates will be talking
exactly the same language as the PE houses.

A surprise to many candidates is the speed with which FD appointments are
made. Approximately half of FDs are appointed pre-deal ­ typically these job
offers are made subject to completion, just two weeks before finalising the
deal. The other half of appointments are made where an investment is either not
performing to target or where the FD is failing to deliver the information the
banks and investors need. In this case, they need to replace an FD as quickly as
possible.

The real attraction of private equity is the ability to take a stake in the
business which, if things go to plan, could be very valuable within a relatively
short term.

A typical FD salary in a PE deal is around the £100k mark ­ often this can
mean taking a drop in basic salary, for people used to working in larger
businesses or corporates, but with the expectation of seeing a sizeable return
on investment.

The FDs we place are generally expected to raise between three and six
months’ salary to invest, usually through a mortgage or bank borrowing. Many FDs
will have been paid off from a previous job and use some of the pay-off for
their investment.

As one director said, this level of stake is pitched to be ‘enough to get you
out of bed on a cold January morning, but not enough to give you sleepless
nights’. If successful, this stake should deliver a return of £1m or more. Of
course, it almost goes without saying that the stake can be lost entirely.

One route for directors to enter the private equity market is to go in as an
interim, if you can be immediately available.

SandpiperCI, the supermarket chain in the Channel Islands backed by Duke
Street, was recently struggling to find someone who would relocate to the
Islands. We placed a very high-calibre candidate as an interim, originally for
six months. However, after just three months he was offered the job of permanent
finance director, a fabulous opportunity.

The challenges for an FD in private equity are considerable ­ but so are the
job satisfaction and financial rewards.

Octopus investments

Originally established in 2000, Octopus has £300 million of funds under
management and a portfolio of more than 50 investments.

They focus on businesses with a proven business model, strong growth
potential and an established management team. Directorbank has worked with them
for a year and placed four FDs nationally.

Richard Taylor heads up deals in the north of England: ‘I would say that two
out of three deals that I see require an FD.

‘Bigger deals probably already have the management structure in place. But in
the lower mid market, the businesses we are interested in have experienced a
period of aggressive growth. The sales team has grown and the operational
infrastructure has expanded to deliver these increased orders, all under the
leadership of the key individual within the business, the CEO. The financial
function often gets left behind, requiring additional resource and experience.

‘We need to take a lot of comfort from the financial information provided by
the business and to limit the risk when finding FDs. We look to place high
quality FDs who have previous experience of operating at this level.

‘We are definitely more interested in finding the right calibre of FD rather
than focusing on sector specific experience. We also look at whether a
prospective FD has prior experience of working with VCs – understanding the
requirements of reporting is an asset too. What we don’t want is the additional
risk of someone growing into the role.’

John Pearce is head of the FD division at
Directorbank