by: Steven Haug and Evan Markgraf
In the fast-paced world of private equity, finding the right talent to guide portfolio companies through scaling, restructuring, and investment objectives is critical. Traditionally, searches for financial professionals have often relied upon weeks of relentless headhunting, using a kind of hit-and-miss strategy so often associated with executive placements.
Results are achieved much too slowly with this approach. Private equity firms can’t afford this kind of lag when every decision determines investment results. What is the answer for MDs and CSOs who need flexible and cost-effective financial oversight but can’t engage in long recruitment searches with uncertain results?
The solution is two-fold. First, don’t get bogged down by the traditional assumption that you need a full-time executive to address financial challenges. Instead, the services of a Fractional CFO can be utilized across multiple portfolio companies or contracted at a single enterprise for a sliver of the cost of a full-time CFO. Second, by moving away from traditional executive placement practices to a highly data-driven, evidence-based approach that yields a >90% retention rate, you avoid the risks of a sluggish, inefficient search.
The use of fractional CFO services is on the rise among private equity firms, especially those operating in the lower and middle markets. Let’s find out why.
Why private equity firms are turning to fractional CFOs
Simply put, fractional CFO services (also called outsourced CFO services) allow a level of flexibility that a full-time chief financial officer doesn’t yield. In the lower and middle markets, a highly skilled and experienced fractional CFO can manage the financial complexities of multiple portfolio companies instead of just one. Alternatively, a fractional CFO’s services can also be contracted for a single company at a vastly reduced cost compared to a traditional FTE hire.
When the constant focus is on the bottom line and resources are spread extremely thin, this solution makes perfect business sense. Let’s take a look at just some of the key benefits that private equity firms have been getting from using fractional CFOs.
Cost-efficiency combined with high-level expertise
Fractional CFOs have the same level of financial expertise as a full-time CFO. However, the investment into fractional CFO services is significantly less than that of their full-time counterparts. The reason for this is that fractional CFOs spend a set amount of hours working with each company, reducing the cost of having a financial expert on board significantly. This makes it an attractive solution for PE firms looking to streamline their strategic financial planning function without sacrificing quality.
Scalable financial management across multiple companies
One of the main advantages of a fractional CFO is their ability to manage the financial performance of multiple portfolio companies simultaneously, creating sustainable growth for each one. Whether the companies are in the early stages of growth, undergoing restructuring, or preparing for a sale, the fractional CFO has the expertise to guide them through important strategic planning and financial analysis.
Objective and unbiased financial oversight
Operating much like an external consultant, but with intimate company knowledge, fractional CFOs can also bring a fresh, unbiased perspective to financial decision-making. They are not entangled in company politics, allowing them to provide objective insights that drive financial efficiency.
Whether it’s about cash flow management, reevaluating cost structures, improving EBITDA, or optimizing capital allocation, their impartiality can help align the financial strategies of portfolio companies with the overall investment goals of the PE firm.
M&A Expertise and post-transaction integration
Mergers and acquisitions are a staple of private equity. A fractional CFO can guide companies through the entire M&A process, from pre-acquisition due diligence to post-transaction integration. Their expertise can be the difference between a successful acquisition and one that drains resources.
Now that we’ve briefly discussed why a fractional CFO will be as effective as a full-time CFO for private equity portfolio companies let’s examine how you can find the ideal executive.
Applying evidence-based recruiting in fractional CFO placements
Evidence-based recruiting practices – why are they effective?
The traditional way of making hiring decisions was all about intuition but this can be a hit-and-miss approach due to recruiter bias. A more predictable way of finding the right executive candidate is evidence-based recruitment.
This method relies on data and analytics to make hiring decisions. It incorporates metrics such as candidate performance data, behavioral assessments, and structured interviews to ensure objective decision-making. By focusing on quantifiable evidence, recruiters minimize bias and ensure they are hiring the best talent based on facts and predictive indicators.
This approach is systematic and repeatable, as the founder of ECA Partners, Atta Tarki, writes about in his groundbreaking book Evidence-Based Recruiting. Because it is a methodical approach, companies can create a consistent hiring process that delivers predictable results across different roles. Tools like structured interviews and performance-based assessments are key features in this process. Companies like Netflix and Google have also used these methods to dominate their industries.
The utilization of technology in evidence-based recruitment
While traditional methods incorporate some technology (e.g., applicant tracking systems), they rely less on predictive data and more on human judgment. However, with tools such as predictive analytics, AI assessments, and data dashboards providing real-time feedback into the recruitment process, evidence-based recruitment offers a more stable approach that is free of human bias.
ECA has taken it a step further and developed a proprietary recruiting system, CASCADE®. It utilizes objective and well-defined measures to evaluate candidates, ensuring that the CFO candidates are not only highly skilled but also well-suited to drive value creation in portfolio companies. The results that they’ve been able to deliver with their process are impressive.
They can staff interim executives (including fractional CFOs) within 1-2 weeks and have a 98% retention rate to back up the effectiveness of their system.
Steven Haug is a Managing Director at ECA Partners. He can be reached at [email protected]. Evan Markgraf is a Senior Director at ECA Partners. He can be reached at [email protected].
