In times of economic difficulties, rising interest rates, and market challenges, public company CFOs need to take a proactive approach to value creation, and they should take a nod from private equity portfolio company CFOs who “don’t play wait and see,” according to McKinsey and Company.

Ankur Agrawal, a partner at McKinsey, is a co-author of a new report highlighting what private equity (PE) portfolio company CFOs can teach public company finance chiefs. However, PE firms have a reputation for slashing and burning, cost-cutting, and layoffs, and not necessarily a focus on long-term investments. So I asked him about that.

“Despite the terrible personal and emotional impact on employees, we are seeing an increasing number of both private and public companies reducing costs and conducting layoffs to prepare for slower growth or to better align their cost structures,” Agrawal says.

What McKinsey’s research highlights is that from the moment a PE fund acquires a company, they’re on the clock, and they have to act fast, he says. That means it’s typically just a five-to-seven-year period in which a PE CFO has to create and manage through “a value creation plan and holding firm along the execution milestones each year,” he says. “This contrasts with the quarterly earnings guidance and annual resource allocation cycles in a public company.”

PE-backed companies usually develop a 100-day plan that outlines the key execution points to achieve the investment goals, according to the report. Then a road map is created to align priorities and resources in the short term, and set the pace for the organization. 

‘Ambitious but achievable targets’

Often public company CFOs pull back and see their primary job as risk avoidance, but PE CFOs live daily with the risk of falling short of achieving double-digit returns, so they’re bold, McKinsey finds. Public CFOs should “define and incent ambitious but achievable targets.”

Does that mean public CFOs should be willing to take more risks? “No,” Agrawal responded. “What we are suggesting is ensuring the targets have an element of ‘stretch’ and ‘base’ which enables entrepreneurial idea generation, more individual and team ownership, and puts execution front and center.” The stretch goals should be market-based, and not arbitrary, he says. It should include “a view on external market context and not default to averages which is sometimes the case,” Agrawal says. “It is even more true in the face of macroeconomic uncertainty that the focus should be on the range of outcomes instead of a base goal.”

Since PE portfolio company CFOs have to work quickly, they “scrupulously mind ROIs” and “zealously” monitor how resources are allotted for every function, authors found. “Typically PE portfolio company CFOs have greater debt leverage and therefore tend to have a lower margin of error,” Agrawal explains. 

McKinsey offers the example of a PE-acquired company, (not named) in which the new CFO dug into marketing’s spending that stayed relatively constant and unnoticed for years. The CFO and chief marketing officer then codified and prioritized marketing projects based on effectiveness. “Ultimately, the CFO reallocated more than 40% of the marketing budget, increased ROI, developed a common language (using financial metrics) for operational decisions,” according to the report.

Hiring and retaining talent is a major concern for CFOs. “Some PE portfolio companies have recognized the need to put high performing talent in key roles, especially roles that align with the largest value drivers for the company’s value creation thesis,” Agrawal explains. “Within the finance teams, the ingredients of a healthy talent development culture at PE portfolio companies include the openness to hiring less tenured talent, providing cross-functional project-based opportunities, stretch assignments, and active engagement of PE owners or operating partners in financial reporting.”

Adopting an investor mindset can be helpful for all finance chiefs during these uncertain times, McKinsey finds. PE-backed CFOs are “more vigilant in asking hard questions, shaping strategy, and redeploying resources,” according to the report. That skillset will come in handy as “the PE wheel keeps spinning, and will continue to do so in 2023,” a recent Bloomberg Law analysis states.

“Today, it’s essential for CFOs to use a ‘zoom in and zoom out’ mindset and communicate with investors about how the company is navigating the macroeconomic uncertainty,” Agrawal says. Perhaps public company CFOs can use this time as an opportunity to build a bold edge on insights, commitment, and execution.

See you tomorrow.

Sheryl Estrada
sheryl.estrada@fortune.com

Big deal

Inflation is cutting into household budgets and changing investor habits, a new study by Wells Fargo & Company finds. A quarter of respondents surveyed with money in the stock market are moving investing dollars into everyday essentials like groceries (58%), transportation and gas (47%), and utility bills (42%), according to the report. Today’s market conditions have more than 77% of investors surveyed concerned about fluctuations in the market and 42% admitted they want to cash out of their investments. If they could do so without tax penalties, 29% of respondents said they would cash out their IRA or 401(k) investments. The findings are based on a national online survey of 2,000 U.S. conducted Sept. 21–27.

Going deeper

"Your Competitors Aren’t Always Who You Think They Are," is a new report in Harvard Business Review. It addresses how you can devise a winning business strategy as you are competing not just against incumbents or upstarts from your industry, but against the changing expectations of customers. "The ultimate test of your strategy is not how well you stack up against what your rivals are already doing, but whether or not you live up to what your customers believe you can and should be doing," according to the report.

Leaderboard

Matt Steinfort was named CFO at DigitalOcean Holdings, Inc. (NYSE:DOCN), which offers cloud products, effective early January 2023. Steinfort comes to DigitalOcean from Zayo, a global communications infrastructure platform, where he was CFO. Before joining Zayo, Steinfort founded Envysion, a video intelligence SaaS company, where he also served as president and CEO. He has also held leadership roles at ICG Communications, Level 3 Communications, Bain & Company, and Cambridge Technology Partners.

Jason Whiting was named CFO at Mercury Financial, a fintech. Whiting will succeed Steve Carp, who was CFO for the past five years. Carp has been appointed to lead corporate strategic planning. Whiting will join Mercury Financial from Barclays where he served as the head of strategy for the Americas, leading a team to develop growth strategies for the Global Investment Bank, Global Markets, and the US Consumer Banking Business. Before his strategy role, Whiting spent over 20 years in Investment banking at Barclays and formerly Lehman Brothers, including serving as head of banks and specialty finance.

Overheard

"I am deeply honored to be asked to again lead this remarkable team, with a clear mission focused on creative excellence to inspire generations through unrivaled, bold storytelling."

—Bob Iger, who stepped down as CEO of the Walt Disney Company in 2020, made a statement about his return to the position. Disney’s board announced on Sunday night that Iger would return as chief executive, ousting current CEO Bob Chapek. To save a floundering company, the board is following a well-established strategy: bring back the last successful CEO, Fortune reported.