TOTO: Succession battlescars

Speaker A: Foreign.

Speaker B: Welcome back, everyone, to another episode of Top of the Ops, a, uh, podcast brought to you by the Drawdown. In each episode, we explore a topic or theme impacting operations and finance professionals in private markets, giving you a perspective on the challenges faced by operational leaders and the solutions available to them. I'm joined today by the Drawdown's deputy editor, Matthias Plotz, and reporter, uh, Tania Kushal, two journalists who make excellence look as easy as Keely Hodgkinson and Georgina Huttabel.

Speaker C: Good morning. Good morning. I'm not even going to try to figure out who those people are.

Speaker A: Um, it is good to have you in the office. Um, I googled the name, so I will say thank you for the compliment, John.

Speaker B: It's definitely meant as a compliment.

Speaker A: Yeah.

Speaker B: Um, so, uh, for today's episode, Tanya, we're looking at the tricky process of CFO succession, which is something you've been writing about recently. So do you want to give us a little bit of an intro and rundown of the topic today?

Speaker A: Yeah. So, uh, I started working on this last year and it was something I wrote about for the last December January cover story of the magazine, which had lots of references to Hitchcock films, if you are a fan of. So before we get deeper into this topic, we're going to start with some context. The CFO role is, of course, changing. Traditionally, a cfo, particularly within smaller firms, has had to wear multiple hats. They're often responsible for finance plus legal, tech, operations, sustainability frameworks, et cetera. But some firms have it as a dual role of CFO and coo. But all of these functions within the CFO office are under pressure to become more efficient to facilitate scaling, which only further complicates succession planning. Last year, there were notable CFO successions that we covered in detail on the drawdown. For example, CLARED Capital, Revia, uh, and Flex Capital. All of them had a range of internal promotions to external hires or interim hires. Regardless of whether a GP is looking for an interim or moving up a, uh, finance professional in house, the increasing demands of the role has in a way limited the pool for gps.

Speaker B: Yeah, so while a requirement to wear multiple hats is nothing new for mid market, low mid market or emerging managers, within that CFO role, I do think the skill set is changing, um, particularly given how AI is disrupting working processes, um, and also look, the wider market conditions. So it's an lp. Friendly market. Managers are having to work harder to fundraise and that means greater demands on reporting. And as we've heard plenty of times over the last couple of years. I mean CFOs are now much more front and center in investor relationships.

Speaker A: And one of the key players in this are forced recruiters because naturally they see this day in and day out. I spoke to Glenn Roberts from recruitment firm Aria Partners to find out qualities that go beyond what is on paper for candidates. Where should the search begin and thoughts on the next generation of CFOs. So let's take a listen. Joining us on the Drawdown podcast is Glenn Roberts, the co founder and director of uh, recruitment firm Aria Partners. Welcome to the podcast, Glenn.

Speaker D: Thank you, Tanya. Yeah, very pleased to be here.

Speaker A: So of course you, um, work a lot with clients, uh, looking to hire within, uh, the fund finance space and also of course finance roles, especially the CFO role. So as on today, the CFO role requires an individual to be connected to all departments of the firm. So from a recruiter perspective, where does the search begin? You know, how can the succession planning team and the recruiter find these sort of jack of all trades CFOs?

Speaker D: Sure, I think, I mean really, really good question. It goes with the evolution of the CFO role over the last, definitely accelerated in the last five to 10 years. But going from a numbers, you know, very linear, uh, back office type role to being at the forefront of a firm's growth and development. I think a lot of these characters exist in the existing kind of private markets ecosystem. There's plenty of fantastic CFOs, finance directors I know who have embraced change, who've moved beyond the numbers, getting behind data, AI adoption and really adding value rather than just being the sort of old school counting room. Um, I think the industry as a whole really does struggle with bringing new people in. Uh, it's the kind of blessing and the curse of Carrie in a lot of private markets funds that you get a real entrenchment of. You kind of CFOs and finance directors who stay in a fund get to the top of the tree and then it becomes very difficult for them to move on. If you have someone who's forward thinking, who's embracing change, then happy days, it all works. But if you have someone who's wedded to the past, it can be a challenge for a firm to grow and develop. So I think the industry as a whole needs to get better at, not necessarily kind of moving on senior folk, um, before they want to move on, but I think having good number twos really kind of, um, you know, investing in that kind of second layer. The industry also is, I Think getting better at ah, looking outside of traditional. You've worked in a private equity fund since you qualified as an accountant, sort of profiles. And um, there's been a number of CFOs I've seen in the last two to three years come in from banking, insurance, broader asset wealth management. And I think that really adds more diversity to the gene pool more than anything. And a lot of those people bring in kind of cross functional experience, cross industry experience, and can add a lot from outside a traditional private equity or a private market sphere. But I think first and foremost it's identifying the sorts of characters who have worked cross function. By and large a CFO finance director is going to be a qualified accountant. I have seen instances where people have moved from uh, the deal team or investor relations or those sort of related areas into the CFO function. But I really do think for the most part you need to be a numbers person. First and foremost. It's more around your mentality and how much you are embracing the world we live in now and the speed with which it's accelerating.

Speaker A: What qualities do you particularly look for, uh, for the CFO role that are not just on paper that kind of go beyond the experience of what's on paper?

Speaker D: Yeah, of course. I think first and foremost that CFO role is a hugely strategic and commercial role in any organization. There's a big difference between someone who's in the trenches, wedded in the numbers, versus someone who stepped out of that and gone to the kind of next level. Being a proper business partner, being exactly what the board need, someone who's uh, a sounding board, someone um, who's this sort of commercial wingman or wing woman to the firm. It's very, very, um, difficult sometimes to identify that just on CV value. Uh, you really do need to kind of meet people, talk through the examples of where they have supported board, where they have worked on strategic projects, where they've been part of a transformation program, they've been part of fundraisers, they've seen a private equity or a private markets firm through a period of growth and not just being kind of keeping an eye on things as they kind of tick along. Um, and again that just comes with meeting people and drumming down into the specifics of their experience. We call it battle scars. It's the sort of people that wander around with an eye patch on and a dodgy limp and they've been through the wars and they've been through the trenches and it's not an age thing at all. You can develop that experience really early on in your career, you could be 30 and have been at, uh, 10 rounds with Mike Tyson. But by and large, it's those collective experiences, those collective battle scars that a board is buying. They want someone that they know when the going gets good, this person knows how to take it up. Ah, a level when things are looking rocky, this person has got all the skills at their disposal to kind of weather the storm.

Speaker A: So a lot of these financial battlegrounds would really just be the 2008 and Covid crisis and how to deal with those. And, um, is that what some of these firms, uh, are looking for?

Speaker D: I think so. I don't think. Again, I don't think it's necessarily an age thing. What's been really, really encouraging in the last 10 years is that more and more private markets firms are bringing, uh, in. Uh, and again, maybe probably shouldn't touch on age too much, but it is true. You don't need to be in your 50s with gray hair to be a CFO. You can very quickly get to that role in your 30s if you have the right experience. Covid global financial crisis, of course, that helps, but you could have been at a fund that, um, you know, has gone through its ups and downs during a more stable market period. It's, it's more around the collective experiences you develop at some point in your career. Um, you can develop battle scars really early on in your career. You know, you could have joined a fund that's gone through exponential growth. You've had incredible experience in the real formative point in your career, and you've, and you've made it to that CFO position, you know, at a younger age. Or you could be someone who's moved around multiple funds to gain those collective experiences. I, uh, think it's more how you sort of sell yourself. And, and again, what's been super encouraging over the last 10 years is that kind of CFO role is quicker to reach now in private markets, partly down to growth. Private credit now, for example, versus where it was 10 years ago is completely unrecognizable. So diversity, more funds, more strategies, is going to create its role creation. It allows these finance directors, heads of finance, to step into these CFO roles. Um, but I think battle scars is it's exactly that. You don't have to be, uh, an old pirate in their sort of 50s and 60s to reach that point. You can achieve it now much earlier in your career. And likewise, you may well be in your 50s before you hit your first CFO role. It just depends what experience you've had, but collectively you've just got to develop those experiences. I speak to a lot of people who want to be an FD and they're gunning for the title and they're for obvious reasons keen as mustard to get to that point. But their experience has been incredibly linear and static. They've worked in one fund and they've not had a lot of this kind of front loan strategic commercial experience. And it's very hard to sell that as a cfo, uh, in the waiting. Like I said, if you've not gone 10 rounds with Mike Tyson at some point.

Speaker A: Yeah. And looking at of course like the industry's view on the CFO role itself, the views are largely, I've heard, quite split. The role is an investment or a cost to the firm. How do you think that perception will change in the next couple of years or even the next five years?

Speaker D: For sure. I think the great thing about private markets is uh, I rarely speak to a CFO who feels that there are costs or a burden. Okay maybe sometimes when the going gets tough and they look at payroll and realize they're the most expensive employee outside the uh, partners. But I think for the most part um, private markets are wonderfully um, forward thinking industry. The value that CFO creates in terms of especially nowadays, moving beyond the reporting or at least getting the reporting to a point where it's adding value to the portfolio, it's enhancing both GP as well as LP value. And I think those CFOs who have moved beyond the sort of back office reporting to being more forward thinking, supporting the deal team indirectly create a huge amount of value. It's what LPs have been wanting time and time again. It's data, data, data, data. It's uh, a kind of a data dopamine drip. So those CFOs who have tapped into that mine that really, you know, uh, are in that kind of strategic commercial role are immediately adding value. For sure there are plenty of funds where the mindset's old school that finances the, you know, kind of back office and beyond and it's a necessary evil to keep the regulators at bay. But I think that mindset was left a long time ago and for the most part in private markets.

Speaker A: How important is it for the exiting CFO to be involved in the hiring process?

Speaker D: For sure, tricky one. Especially if you're a CFO who is at the point of retiring or exiting for whatever reason and especially if you've been there for a long time. It's that old, you know, big Shoes to fill analogy. Uh, I think it's important that the incumbent is involved in the process but they can't be the lead on the process. That needs to be, uh, the partners or COO who lead the charge as far as deciding what that kind of profile is. There's been a number of succession roles in the last few years with some really big brand name funds too. What's super interesting, looking at the people who've come into those roles, it's been two camps of people. Most encouragingly, there's been a huge amount of female talent brought in both from within the private markets industry as well as externally from banking, insurance, for all the right reasons. The private markets world is still very heavily male dominated and a lot of funds are very conscious. They look at their board of directors. That looks like a scene from the 1970s. So bringing in good solid commercial female talent has definitely made the world a better place. I think in private markets the number twos that have stepped up, um, have been very credible number twos as well. I think there's a number of people I've seen move in the last 12 months who've been that sort of, that kind of CFO and waiting for a number of years have developed a lot of basil scars. But they're of that newer generation where ah, they've moved to my point earlier, they've moved beyond the kind of back office numbers. It's more value enhancement, value creation using data, AI tech. Accepting that the finance world will be a beautiful mess of finance tech, IT data risk at some point in the future. But I think that's been crucial to the survival of the industry. But an incumbent needs to be part of the process for sure. It's their legacy that someone's going to inherit. And there also needs to be a, again this can be for Anyone who's recruited at this level knows the biggest challenge is actually getting the partners to agree on the sort of profile or agree that one person's going to lead it, uh, on behalf of the partnership. Otherwise you get sort of 2, 3, 4, 5 extremely successful, opinionated people and they disagree on the sort of profile that they want to hire. But by and large I think it's been a really, really good last 5, 10 years for these sort of CFO succession roles. But I think most firms are pretty good at making sure they have a succession plan in and there's been a number of people I've seen move a year before the incumbent is due to retire. So it gives plenty of time to kind of take on the reins and gently ease yourself in.

Speaker A: Yeah. And so clearly we're going to see more um, diversity in the senior management roles. What do you think the next generation of CFOs are going to look like? What would they need to start training

Speaker D: now in really good question. I actually had it at breakfast, this exact question at breakfast yesterday morning with um, the CFO CEO I've known for donkey's years and he asked this exact question. What does the future of accounting and private markets look like with um, the AI Armageddon that's going to take over the world like a Will Smith film. But I think in reality you're always going to need a CFO there. And I think the generation, the people that are in their early 20s now that in 10, 15, 20 years will be CFOs will be a far more forward thinking mix of numbers risk, who will have fully embraced tech, uh, tech, especially in AI risk, you're always going to need someone there to guide the ship, to interpret the numbers, to, you know, to kind of make sure that whatever you have in the background from an automation perspective actually is performing and doing its job. Where are these guys going to come from is probably the bigger question. Because we're not hiring at the junior level, are we really? You know, the stats that are in the market at the moment about junior level hiring across the board, all industries, all sectors are kind of depressing to be honest. I think the um, big four big larger accounting firms, firms, professional services firms, will be your sort of source of talent and those people will have come from a far more sort of nuanced training and background that will enable them to be very successful when they move into a private markets fund, into these leadership roles. I don't think it's going to look a million miles different. Fast forward 20 years from now, if you had a job spec for a cfo, is it going to read remarkably different to a role now? I think it will in a lot of respects. But numbers, interpretation of the numbers, using numbers to enhance value drive performance of a business will still be the, the underlying core.

Speaker A: Yeah, it's very interesting about the junior talent aspect because even investment banks are putting loyalty oaths and check ins with their junior bankers to make sure they don't get, they don't go to private equity sooner. So that's, that's very interesting. And before we wrap up, of course, uh, for a manager right now, mid market manager right now, they are just about to begin their, I guess first CFO succession planning. What are some best practices they should keep in mind before they begin the search.

Speaker D: Uh, I think as a starting point, figure out what you want. I know that may sound ridiculously obvious, but the amount of firms that go out to market as I mentioned earlier, with conflicting views of what the firm needs, you need to agree who's the point. All those kind of communications internally need to have happened and you need to have a very clear list of what's important in the role in terms of background level, what skills you're after. Both technical skills, softer skills, cover off all the obvious questions internally. It's crazy how many firms there's someone there who's maybe thinking they're the number two and that if the CFO is going to move on that they've got the job but they're maybe too junior. A couple of roles I've worked like that in the last few years where the communications internally have been a bit, not been great. So you're going out externally to the market and you've not nipped that in the bud internally and told someone who is the kind of the slightly more junior but masses of potential person that they're not quite there yet. So internal comms is key, but agreeing that brief upfront and making sure that you understand the market you're going into. The CFL recruitment should always be a retained search. You need one person you trust to go out there to sell you to find the very best talent in the market possible. And um, I always worry when I hear if, I mean it doesn't happen that often but a finance director, a CFO role that's out with multiple agencies, you question the commitment to hire and, and that sort of thing. But that brief has to be absolutely crystal clear because your message to the market, white noise etc. It's got to be very, very clear around, you know what you're looking for in the hire.

Speaker A: That's all the time we have for today. Thank you so much, Glenn.

Speaker D: Thanks so much, Tanya.

Speaker B: Interesting to get Glenn's perspective there. I think it's um, a fascinating time for recruitment not just within private markets, but more generally across the economy right now as businesses grapple with changing working practices and processes. There were parallels in his comments with conversations I've been having recently about hiring for tech or data focused roles and the priority of finding strategic thinkers for those roles. Um, it speaks to me that across private markets right now, um, a greater emphasis is being put on personality, soft skills, even within the back office, um, at the expense of some of those technical skills which maybe would have been seen as the priority in the past. Um, and actually I suspect that this might be a wider trend across the economy as the consequence of AI adoption in the years to come becomes more embedded and more apparent. Something else that I thought was interesting from the conversation was his point about the need to bring new thinking in terms of firms as the CFO role evolves. We have heard in the past concerns from very experienced operational leaders that, uh, uh, younger generations are yet to build up their resilience, having lived through relatively mild macroeconomic, uh, environments today. So in that context I thought his point that so called battle scars are being highly valued was interesting.

Speaker C: Yeah, absolutely agreed. In particular, the point around experience with crisis situations is a big one. It's brought up every time at the Operational Leaders Summit, um, on different panels actually. I think there's just the general worry that sort of the post 2008 professional generations, they haven't had to navigate choppy waters and therefore lack the experience to do so in a leading role when history inevitably repeats itself one way or another. And navigating those crisis situations is not something that you can really teach someone. It's one of those mistakes you have to make for yourself, um, if you want to apply that metaphor. Two other points and that I found particularly interesting are the remarks about individuals who want to move from the front to the back office roles. Because last year I moderated a panel and they brought up almost the opposite point where in the hiring process you have to spot the people who actually clearly want to sit on the investment team and are hoping that the back office is actually sort of a back door into those roles. Um, and that bundled with this other point that a, uh, highly strategic and commercial role, to me these two together, kind of, uh, suggest a change in perception about how these roles are viewed. Because I think there previously was the image of, in air quotes, just an accountant, where it's clearly waning away in favor of one which is more in tune with what the role demands and the function fulfills. And I think that the reality of what CFOs do day in, day out has sort of then also reached the industry perception, um, around them.

Speaker A: Yeah, I definitely agree with you both. I guess on the point of the next generation, there's already a level of anxiety on what the future holds for them, uh, across industries. And you know, all these aspects of change in perception to change in skills required for these roles are all intertwined. We cannot talk about one without the other.

Speaker B: Right. We're probably out of time though, so before we wrap up, uh, do you both want to give us, um, uh, a little bit of a preview into what to expect from the drawdown in the coming weeks.

Speaker A: So I'm working on another long form feature about the challenges of standardizing processes. Accounting is largely standardized across the industry, but can the same be said about investor, tech onboarding or data processes? I'm also looking at potential risks of not standardizing some functions at, uh, gp. And as always, there are also some upcoming GP profiles.

Speaker C: Yeah, uh, I have two features to off note. One of them is a bit of an answer to a cover feature I wrote last year about fund administration and its PE backers. And in that cover feature was pointed out to me that the role of fund administrators needs to evolve. So I've now gone and spoken to fund administrators on how they think about this. And then there's another feature I'm working on on the difference between climate risk and esg, which is sort of becoming their own different functions almost within gp. So I'm looking at the operational implications of this divide, um, and completely unrelated to of those. But going back to Tanya's reference to Hitchcock in the intro, I'd be very curious. What is your favorite Hitchcock movie?

Speaker B: Putting me on the spot there? I don't, uh. Um.

Speaker A: Yeah, yeah, I'll have to think about that.

Speaker B: Yeah, I like. So I'm always looking for the smart choice, right? Like pretentious choice. So maybe I'd say something like Rope Fair.

Speaker C: That, uh, that is definitely the pretentious choice.

Speaker B: The technical aspects. Right. Of the kind of one shot idea. That would be my suggestion. Bought Tanya some time, you know, because

Speaker A: the title of the COVID story on CFO succession planning was To Catch a Thief. I will say To Catch a Thief.

Speaker B: Okay, that's, uh, fair. Yeah, yeah, yeah, Very good. Okay, that's definitely enough from us today. So all it leads me to say is thank you, Tanya. Thank you, Matthias. Obviously a big thank you to Glenn, our guest today as well, and most importantly, thank you to everyone for listening.