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How portfolio finance functions can drive more value in private equity

Authors

  • Chris Dente

    EY Americas Business Consulting Finance Leader

  • Nicola Grimes

    EY-Parthenon Partner, Strategy and Transactions, Ernst & Young LLP

  • Jon Morris

    EY-Parthenon UK&I Turnaround and Restructuring Leader and EMEIA Working Capital Advisory Services Leader

Contributors

9 minute read 28 Feb 2025
Related topics
Private equity
Growth
Finance
Long term value

Creating a fit-for-purpose portfolio company finance function is becoming more critical than ever to drive value.

In brief

  • PE-backed companies increasingly recognize the need for investment in Finance, especially in the early stage, to meet investor expectations and drive value.
  • Critical value creation areas for fit-for-purpose Finance include organization, talent and culture, process simplification, data management and technology.
  • The most effective finance transformation approach for PE-backed companies focuses on sprints of incremental improvements delivering high-impact at speed.

Leading the finance function of a private equity (PE) portfolio company is increasingly challenging. CFOs are required to constantly balance meeting investors’ expectations, executing the value creation plan (VCP) and fulfilling governance responsibilities. With changing market conditions and the pressure to achieve consistent returns and maximize valuations, the stress and complexity of the role have intensified. 

CFOs often express two main concerns, ‘Why is it still so difficult?’ and, ‘Even with more data and advanced tools, execution is challenging, making it hard to determine priorities.

Nicola Grimes

EY-Parthenon Partner, Strategy and Transactions, Ernst & Young LLP

It is therefore critical for CFOs to have robust finance operations that provide timely, reliable data and insights to help support growth opportunities and enhance cost efficiencies. They provide confidence in informing and delivering the financial benefits of the value creation plan and on-going operational performance.

PE deal teams are increasingly looking for improvement opportunities to enhance the effectiveness and efficiency of the finance function as a significant value driver. For new acquisitions, this means identifying what changes need to happen quickly and integrating them into the value creation plan so that the function delivers financial value.

A finance function doesn’t need to be in the top-quartile to be effective. The skill of CFOs is to rigorously prioritize investments in areas that align with the business model and key value drivers. They will also need to establish that the finance team excels in critical competencies that drive growth and profitability. By differentiating between processes that require excellence and those where an adequate approach suffices, the organization can allocate resources more efficiently.

Based on the experience of EY teams, it is best for PE firms to adopt an agile finance transformation by focusing on high-impact sprints that can be implemented rapidly in response to market changes and business needs. This approach prioritizes changes based on ROI and the specific stage within the investment cycle.

In supporting such transitions, EY teams have identified four value creation outcomes and four key enablers to create a fit-for-purpose finance function.

The fit-for-purpose finance function

Click on each outcome and enabler to learn more

Key outcomes to drive value creation

Leading finance functions focus on four key outcomes that support business objectives and accelerate results:
1. Delivering an enterprise-wide value creation plan:

Finance plays an integral role in developing, executing and governing value creation strategies. By collaborating with deal teams and management early in the process, Finance can accelerate delivery of the value creation plan, establishing a clear framework with defined goals, KPIs and accountability, serving as a single source of truth for the organization.

Clarity in the finance function is critical for generating enterprise-wide insights and true value creation. Investments into Finance allow for more informed, strategic decision-making better equipping companies for long term success and greater value upon exit.

Ivan Lehon

EY Americas Private Equity Markets Leader
2. Supporting growth and business performance:

To drive business growth, portfolio companies need integrated financial forecasting and budgeting processes, with robust monitoring of performance KPIs. EY analysis shows that proactively delivering actionable business insights and decision support can enhance free cash flow by 3% to 8% of revenue and improve reporting accuracy by more than 10%.

The ability to generate relevant, reliable and readily available KPI reporting provides the insights necessary to enable accelerated and more-informed decision making, but few organizations have been able to effectively deploy these practices.

Chris Dente

EY Americas Business Consulting Finance Leader
3. Improving functional costs:

EY analysis shows that private equity-backed finance functions typically cost (median) around 2.6% of company revenues, significantly higher than the 1% seen in the broader corporate sector.1 While achieving the lowest cost is not always the goal, targeting a fit-for-purpose performance is critical. Higher costs often indicate inefficiencies in the operating model, such as complex, non-standard or manual processes, inadequate or absent shared services and unclear roles and responsibilities.

4. Providing effective liquidity management:

Effective liquidity management is critical to executing a value creation plan successfully. This involves optimizing working capital, improving cash forecasting and visibility, and implementing efficient treasury and cash management procedures. By maintaining a firm grip on cash flow, organizations can help establish that they have the necessary resources to support growth initiatives.

Cash performance has always been important in PE-owned businesses, but the current economic environment is making it even more vital — not only in terms of value creation but also building resilience.

Jon Morris

EY-Parthenon UK&I Turnaround and Restructuring Leader and EMEIA Working Capital Advisory Services Leader

How EY can Help

  • Private equity value creation services

    Value creation is at the core of every transaction investment thesis. Our business is organized, resourced and led to help private equity firms transform companies and increase their ability to create more value across their portfolio.

    Read more

Four priorities to drive change

The selection of priorities depends on the timing of the value creation goals, the investment life cycle and the maturity of the finance function.

 

Prioritizing people and process in PE backed companies establishes standardized ways of working, quickly unlocking operational improvements.  This foundation not only streamlines workflows but also serves as a critical enabler for tech-led automation, allowing technology solutions to be integrated and effectively leveraged to enhance performance and scalability.

 

1. Organization, talent and culture:

Assigning appropriate resources across roles, identifying skill gaps and enhancing in-house capabilities through training in traditional and emerging areas is essential. Establishing a culture of investing in people development with common values and principles will create a high-performing and resilient team.

 

2. Process standardization and automation:

Today, most organizations are looking to drive value creation improvement through artificial intelligence (AI) and automation. However, there is often a greater near-term impact by first understanding the work that can be addressed through the elimination, simplification and standardization of processes. Streamlining and eliminating overly complex processes, closing system gaps and standardizing operations all enhance productivity. Automating repetitive tasks by leveraging ERP functionality, digital tools or platforms and generative AI (Gen AI) can drive further efficiency.

 

3. Strong data governance:  

Reliable data governance is essential for setting meaningful baselines, realistic targets and ensuring that reporting is trusted by management. Many portfolio companies, particularly scale-ups, often overlook this aspect. A data-centric finance organization leads to enhanced data quality and establishes a single source of truth, delivering consistent, right-first-time data and insights.

 

4. Technology and digital tools:

Strategically assessing the technology landscape in Finance can yield substantial operational gains. Focus should be on practical solutions rather than seeking best-in-class practices. Close collaboration between Finance and IT is essential to clearly communicate functional requirements and expectations before selecting tools and making investments. With the rapid evolution of financial technology and the increasing use of Gen AI, it is important for Finance to prioritize time and resources to establish the right digital tools and priorities.

 

Creating an effective and efficient finance engine for value creation

Now is the time for this function to emerge as a key enabler of value creation. By prioritizing the establishment of a fit-for-purpose finance function in their 100-day plans and recognizing that tactical investment in finance transformation is needed early in the investment cycle, PE firms will not only accelerate the delivery of the VCP but also unlock cost reduction, ultimately enhancing the exit multiple. 

 

For new investments, initiating this transformation early is crucial. It establishes a robust start for CFOs, particularly considering the declining average tenure of C-suite roles.  Meanwhile, existing portfolio companies may require a compelling narrative around the necessary changes to support the future equity story, one that will withstand rigorous scrutiny during exit processes.


To compare to overall corporate finance function costs, data from APQC was leveraged. Representing 5,769 companies, the average cost of the finance function as a percent of revenue is 1.1% and a median of 1%. For the 2,322 companies in the APQC data with revenue at $1B or above, the average is 0.87% and a median of 1.0%.

Summary 

Through increased focus on delivering on the enterprise-wide value creation plan, supporting growth and performance, functional cost improvement and providing effective liquidity management, private equity-backed CFOs can accelerate results in today's competitive landscape.

About this article

Authors

  • Chris Dente
    EY Americas Business Consulting Finance Leader
  • Nicola Grimes
    EY-Parthenon Partner, Strategy and Transactions, Ernst & Young LLP
  • Jon Morris
    EY-Parthenon UK&I Turnaround and Restructuring Leader and EMEIA Working Capital Advisory Services Leader

Contributors

Related topics
Private equity
Growth
Finance
Long term value

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.
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