Despite the recent steep decline in private-equity deals, the job market for CFOs at portfolio companies promises to brighten later this year.
A possible easing of the credit crunch could provide more funding for private-equity acquisitions, resulting in top-management shake-ups at many newly acquired companies. At the same time, the tough economic environment could prompt private-equity firms to replace finance executives at portfolio companies that fail to perform as expected.
In late April at the Milken Institute Global Conference in Beverly Hills, Calif., two executives involved in private equity offered glimmers of hope that more debt financing will be available later this year. Leon Black, founder of Apollo Management, was quoted as saying, “We’re well on our way” to a recovery in the credit markets; and David Solomon, co-head of investment banking at Goldman Sachs, reportedly said, “Things feel better.”
Indeed, banks and brokerage firms have reduced their U.S. leveraged-loan volume to $93 billion at the end of April from a peak of $237 billion in July, according to Standard & Poor’s, which could open the door for new loans. On the other hand, S&P also warned that curbed investor appetite for buying leveraged loans in the secondary market is forcing up interest rates on such loans.
While acknowledging that private equity’s search for CFOs “has gotten a little quieter” this year, Christopher Langhoff, a consultant at executive recruiting firm Russell Reynolds Associates, said private-equity firms still need new CFOs, particularly for their smaller portfolio companies.
“We’re seeing quite a few CFO searches this year for companies with annual revenues of $10 million to $20 million,” said Langhoff.
Private-equity deals have recently skewed toward smaller companies largely as a result of tight credit. The average private-equity acquisition in North America totaled $101 million for the first quarter of this year, compared with $475 million during the same period last year, according to Mergermarket. The number of acquisitions declined 44 percent, to 138 deals from 249.
Small companies, often harder hit by rough economic seas, are more likely than large ones to switch CFOs in the months ahead, Langhoff said. But he added that he expects to see an across-the-board uptick in private-equity CFO searches thanks in part to the poor economy.
“With the sheer magnitude of private-equity transactions the past 18 months, a natural evolution will work itself out,” said Langhoff. “A honeymoon period will end, and they (private equity firms) will decide that some guys and gals are keepers, and others are not. And given the economy, such as it is, poor performance will hurt some teams. Private-equity owners will not hesitate to make changes.”
Private equity’s sensitivity to performance underscores the fact that CFOs at portfolio companies face different kinds of pressures than do those on the public side.
While finance executives at portfolio companies escape the tyranny of quarterly earnings reports and the burden of regulatory compliance, they often must focus laser-like on cash flow, needed to service the substantial debt that private equity firms incur.