This is create the next from Pro CFO partners, where every week we explore strategies and ideas for financial management and growth to help today's businesses but their financial picture and context. Hi, I'm

Chris Bintliff with Ayesha bhana from Pro CFO partners. And we're continuing our series where we are looking into exploring the financial relationships that different industries and verticals, uniquely face are combinations here to talk to us today about private equity. And I said, what are some of the hurdles, the mid market private equity companies face, especially where their financial where their financial relationships are concerned in the way that they surround themselves with the support that they need? To make sense of some of the unique financial issues and criteria that they face?

Yeah, firstly, Chris, thanks for having me. And that's a really great question. You know, private equity is a fairly complex industry, but if I can explain it at a very, very simple concept, they usually, you know, they find a company, they buy the company, they add and create value to this company, and then they sell it. And one of the biggest hurdles that we see a lot of these middle market private equity firms face is during the creating and adding value phase. Because in order for this to be to, for this to be effective, there needs to be a robust financial reporting function, which many of these portfolio companies lack, their finance functions are group good, but they're just not great. And so these private equity firms, they have a lot of skin in the game, you know, they've just invested a lot of money into these portfolio companies alongside their investors. So the stakes are very high. And, and the stakes are high for the private equity companies and for the portfolio companies. And the scrutiny is very intense. And the the, the time slot to actually show results is very short. So the solution is, is to bring in an interim CFO, someone who can assist the management team, so that they can bring in that level of expertise, you know, really provide that level of support to the financial function of the portfolio companies, on a day to day basis,

are many private equity companies staying inside of a lane that makes sense. So that once they figure out kind of what their secret sauce is for the reporting they need and the people they need around them, they just kind of replicate that or they go or the opportunity is so that each time they're facing a new situation, they need to wrap their heads around new ways of reporting, or new ways of expressing and articulating the value that they're trying to achieve.

No, that's a great question. Um, basically, for a lot of these portfolio companies, they, for these private equity companies, they do like to stay in in their in their lane. And there is usually a standardized process in terms of how they want to get the reporting from their clients. Now, would that change a bit? from industry to industry? Absolutely. But But there is a lot of standardization that happens in terms of the level of reporting that they need, you know, these private equity industries, they are extremely data driven. So they don't want a QuickBooks report. They want to have their cash flow models in place, they want a lot of the variance analysis, they want budgeting, forecasting, and just a really deep dive into a lot of these companies. And, and so as much as we would like to say it's cookie cutter, but I think that it would really vary depending on on the industry as well.

Let's talk a little bit about those metrics. You mentioned a few. As a CFO, do you find when you get into some of these organizations, that there's consistently the same issue, or the same problem, or we keep stumbling over the same thing? Or if if everybody could just do these two things differently? You'd be surprised how much more? How much easier more streamlined your ledger would be? Or do you find that the uniqueness for everybody's reporting? While there's some that are probably consistent, everybody needs the same things, but others need something else? Are those pretty well understood in these organizations? Or do they really need sometimes a recalibration on what they think they need and what they're doing right and wrong?

Yeah, you know, um, Chris, that's a great question. I've been on both sides of the table between my roles at Blackstone and State Street. And what I've seen on the private equity side is because they have these outside investors or their limited partners, you know, they focus on certain metrics, which is they focus on their IRR, which is internal rate of return, they focus on their multiple on the investment. And then also this, this like hurdle rate, which is like the minimum acceptable rate of return on investment. And we can probably die on this a lot more, but I won't. But, but on the portfolio company side, there is usually a standard of information that a lot of these private equity companies look for. So, you know, they focus on, they're very focused on cash flows, they're very focused on liquidity, and also EBITDA, which is your earnings before interest, taxes, depreciation, and amortization. And, you know, a lot of times they really want to dive into these reports, whether that is on a weekly basis, or a monthly basis, and maybe even quarterly and for the cash flows, they even might want a daily report, if the company is going through some form of a crisis. So these are some of the metrics that a lot of these private equity firms look for. They also really focus on expenses, you know, really looking into what's increasing the expenditures, really, really identifying it. And it can really start from like, the budgeting aspect of it and comparing it to the actual results. And really diving into those variances and the CFO that they bring in can really be a part an integral part of that process is really diving into those metrics and being able to deliver to these private equity companies, and on a timely basis.

You know, that's a good a good illustration, because sometimes in a lot of the conversation we've been having with pro CFO principals, we've talked about how we have to move beyond the CFOs role, just being one of let me show you the reports. Really one of let me guide you through what they mean, and give you some give you some advice and insight. Information is one thing, but insight is another on where where we should go with these things. Help me understand a little bit more about that relationship that you think both private equity companies but portfolio companies can benefit from the CFOs role in an advisor and in a compliment to the executive decision making and not just as a resource to deliver to us information, but then we need to figure out what to do

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Um, yeah, no, absolutely, from your from the first thing that you mentioned, which is really the expectations of the CFO. And I think that that has really changed a bit, you know, before CFOs, were really expected to, to kind of look backwards and look at the historical data. Now, they're really asked to be not only the scorecard keeper, but really be more strategic and to look forward. And, and one of the biggest benefits that we see with having a CFO within a portfolio company is really working with the private equity sponsors, and being a liaison for them, you know, just having a direct link to the CEO or the founder, if they're still part of the organization. And really the rest of them, the management team, you know, Chris, the CFO can provide really that that real time support, you know, for the private equity team, and really put in that unified effort. The the private equity firms have their own projections, which they obviously need to deliver to the investors and, and the, they want to make sure that there is somebody in house in this portfolio companies who can help them establish their goals, whether it's short term, whether it's long term, so that they can be on the same page, you know, private equity companies, they have their own investment strategy that's in place their own investment thesis, and they want to make sure that that's being properly executed, you know, they want to make sure that there is someone in that organization who is aligned with their strategic support their their own strategic alignment as well and being able to deliver

what I should what what about this work in particular excites you or makes you your expertise here is clear, but what what really turns your gears with this so that this is a space where you are really feeling personally Not just invested but motivated and and even Nelson likes to Nelson TEPCO likes to joke when I tell him, he's creative. He says, I don't know if that's the first word I would use for me. But I honestly think that a lot of us are very creative in their ways of seeing so many different scenarios in ways that, you know, are so unique. What about this particular realm as specialty were exciting to you?

Yeah, no, I think I think you're right there, there is some level of creativity that we can absolutely bring to the table. For myself, I would have to say if I put myself in the shoes of a middle market company, and they're trying to get investment from a venture capital, or private equity firm, you know, what they need is they need someone there who can speak the language and play the game, and really being able to, to answer to a lot of the deliverables that these private equity firms have, you know, a lot of times there's like, always some type of a fire that needs to be put out and, and for these portfolio companies, that that expertise is really lagging, lagging and so I think that, for me, it's very exciting to be able to, to fill those shoes to be able to be that liaison and being able to speak the language that is being very pertains to the private equity world. And, and and really being able to kind of leverage my experience from that into these like portfolio companies.

I Shabana from Pro CFO partners, thanks so much for spending some time with us today. learn so much always do hoping we can pick up the ball again and have a part two in part three and Part Four, because it's some of those things you said we could dive into that I would really love to dive into that.

So I would love to thank you so much. Thank you for having me.

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