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Big Challenge: Running FP&A at a Private Equity-Owned Firm

  • By Nilly Essaides
  • Published: 5/10/2016
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When a company is owned by a private equity firm, it typically has a very different management culture from companies with more traditional ownership structures. That presents FP&A with a unique set of challenges. According to FP&A chiefs at PE-owned companies, the management culture at their organizations involves some of the following mantras:

1. Sharp focus on operating units. According to one executive, a big differences between his company and public companies is the owners' razor-sharp focus and deep involvement with operating divisions. "That's because PE firms see their true value in improving operations and driving performance faster. This allows them to achieve their target valuation metrics—the basis for their exit," he said. After all, the target is resale. Some of the larger PE firms have consulting teams that parachute in and implement standard operating procedures according to a set template. "They know what levers to pull for value creation," he added.

2. An appetite for KPIs. Second, the PE owners have an insatiable demand for financial and non-financial KPIs. That's not only because they keep a close eye on progress, but also because they're always benchmarking that performance to other firms in their portfolio. They often focus on financial measures like EBIDTA and cash-based measures. 

3. A difference of opinion. Often, according to another FP&A professional, there can be differences in what the owners and managers believe are the critical financial and operational measures. "It is not an optimal situation where these perspectives diverge," he said. The question for FP&A is how to best manage the company, i.e., should it be based exclusively on the owner's metrics or also on the business metrics they know to be critical to their success. Realistically, said this finance pro, "You can't do both." That means there will be too many metrics, and all of them have to be discussed monthly and quarterly.

The impact on FP&A is direct, according to multiple FP&A veterans and experts.

Greater constraints. "There's a lot less freedom," said one executive. "Public company FP&A teams don't get as involved in the operations." That's driven by the owners' focus. In public firms, the focus is on risk mitigation and governance. At private equity-owned companies, the emphasis is around strategy, value creation, and operational excellence. "You can't pick and choose what you want to focus on. You have to focus on everything, even if you don't think it's important," said the FP&A director. "It's what the owners think that matters. "There's also a lot of cadence around meeting deadlines," he said.

Supporting the M&A flow. FP&A at PE-owned organizations gets involved in a lot of ongoing deal support. The company is always on the block. Before it's sold there are a lot of false starts. "There have to be solid financial models that are driver-based in place that are auditable and withstand due diligence. They have to be ready all the time," said this FP&A professional.

Multi-level reporting. In addition, the owners affect how the company has to look at its own financial performance, since they care less about GAAP. They also want to see costs grouped in a manner that makes sense to them. "There are very specific guidelines on what costs are categorized and where," said the vice president of FP&A at an online education company. As a result, the company ends up using multiple hierarchies to produce information that is specific to the requestor—auditors, owners, executives, line managers.

There's an upside too

Yet it's not all bad. One FP&A executive with experience at larger, publicly traded firms, said working at this smaller, PE-owned company has been more exciting and offers more flexibility. In his role as vice president of FP&A, he can dictate the format and process for management reporting. Sure, the PE owners want to see reporting in the same way from all its owned firms, but internally the company has a lot of freedom to chart its own course.

At his former positions, everyone worked in silos. "As the FP&A executive at a business unit, you didn't see the whole picture." He could see revenue and expenses, but not the entire balance sheet. Now, working within a smaller organization, "you see it all," he said. "I deal with cash, the P&L, the balance sheet, even insurance. "In addition, I'm much closer to leadership at a comparable level." At the PE-owned company, "you have a much broader view. Right off the bat, you know what's going on." 

A longer version of this article appears in an upcoming edition of AFP Exchange.

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