PFM asked Keith Giarman, who leads the private equity practice for global executive search firm DHR International, how the market for private equity firm CFO talent is changing.
How would you describe the market for hiring private equity firm CFOs at the moment: hot or not?
We would not characterize the market as especially “hot” for this talent in PE funds – it seems pretty consistent over the past 5 years. But the market overall for strategic and operationally oriented CFOs is hot everywhere and there are more and more PE funds popping up every day that need to manage more complex accounting and regulatory requirements.
What is driving demand?
All organizations are looking for more strategic and operationally-oriented CFOs: companies, non-profits, funds, you name it. It is not OK to be a glorified controller any more just reporting accurately. Also, there is just a larger volume of need (more funds every day) and not enough proven CFOs to fill the slots.
What does compensation typically look like now and which way is it trending?
All CFO comp has and seems to continue to move north. But to answer that question effectively, you need to segment the market a bit: small funds, mid-market funds and larger or mega-funds. As fund size increases, comp tends to track (as it does in companies). In the mega-funds, especially public ones, the complexity of their accounting, investor relations, compliance activity, etc resembles a large financial services institution these days. Here, CFOs get paid handsomely (no surprise) with a lot of the upside economics tied to stock or carry. The CFO at Blackstone – a public PE fund – got paid more than $18 million last year. For smaller and mid-market funds we tend to see base comp range from $250,000 to $500,000 with bonus at 30 percent on the low end and 50-75 percent on the high end.
What are firms typically looking for when hiring a CFO?
Proven experience in some sort of fund accounting which required interaction with a large LP base and dealing with regulatory and compliance issues. This obviously includes PE funds, but finance professionals who have experience in venture funds, real estate funds, infrastructure funds, and so on, also have such experience even if the investment strategy is different. There are also partner-level professionals inside the top audit and accounting firms who specialize in these areas.
Strong understanding derived from a similar or related fund environment related to registered investment advisor regulations, and reporting and compliance more generally. In some funds, there can be a COO overseeing things like this, as well as IR, with a CFO reporting in; different funds have different structures. Strong understanding of “mark to market” in terms of company valuation and associated internal and external reporting. This is art and science and takes experience and a well-conceived methodology working with outside audits firms.
If the CFO oversees investor relations, especially if there is a large and complex set of LPs, funds will want to see CFOs who understand the nuance of dealing with LPs on regular basis in terms of reporting, annual LP meetings, and soon. In smaller funds, CFOs tend to have broader responsibility making them look more like a chief administrative officer and CFO. This may include responsibility for HR and IT. Some smaller funds will also use CFOs in support of portfolio companies where they are hiring CFOs, raising debt, undertaking M&A, annual CFO conference, etc.
General understanding and culture fit with a fund environment: typically, these funds run lean and want to keep their cost structure low. As elsewhere, this means doing a lot with minimal resources and being hands on. CFOs from pertinent environments will also understand how a partnership functions, how partners get paid, and so on.
Working knowledge of systems and technology: there are a lot of systems available that facilitate proper front and back office accounting, reporting and linkage and communication with LPs. There are also systems available for deal analysis, confidential deal processing, etc.
Are CFO recruits participating in carry from the outset?
This varies from fund to fund, but in order to be competitive, yes, it tends to be in place from the beginning.
What about further down the food chain in the finance function? Are junior roles coming up a lot?
As suggested earlier, as funds get bigger and bigger, they definitely need more staff in the finance function. These roles could be great long-term ones or a place to get “trained” and step into a CFO in a smaller fund over time.