Historically, there has been little desire to have Chairs of Audit on PE portfolio boards. Instead, Operating Partners from the fund itself or Senior Advisors have covered the role. We are, however, now seeing a small, incremental trend in portfolio companies hiring of Chairs of Audit, particularly for the larger, more complex, or highly regulated businesses.
The Chair of Audit hire is becoming a new tactic amongst PE funds to gain competitive edge and to address specific organizational objectives, such as a preparation for an IPO. A good Chair of Audit can bring an extra layer of oversight and rigour that provides comfort to investors, particularly when there is a less experienced CFO in situ. It can also offer new viewpoints and insights and provide valuable expertise about requirements, especially in relation to new regulation, and fast evolving sector trends or threats. Martin Block, NED and Member of the Portfolio Management Team at Hg Capital, commented: “The Chair of Audit role for us is a major consideration, especially now the rules and regulations are more complex, and a greater number of threats exist for businesses, such as cybercrime etc. The risk of bad practice is a key driver in taking it more seriously and we have to uphold a duty of care to our LPs.”
The Chair of Audit advantage
Improving governance and good practice
Uninterrupted progress within a tight timeline leaves no room for errors or vulnerabilities. For many PE backed businesses going through accelerated growth plans, ensuring financial stability and continual risk assessment while driving value-add agendas at pace is vital. Natasha Jones, a Partner at KPMG, and portfolio company auditor, has seen that typically governance and compliance matters have been “covered off by those who have an investment in the business and have been recruited largely for their industry experience (such as a Chairman) rather than a financial background or listed company experience.”
Unlike these individuals, a Chair of Audit can establish greater independence and be a signal to outsiders that business governance and compliance are being taken seriously. She commented: “For someone in my position, a Chair of Audit can also bring that independent scrutiny, and therefore fully engage in debate around management judgments and audit scope / findings with me. There is clearly a fundamental difference in approach between PE and PLC clients – some PE backed companies do cover the audit, risk, and compliance agenda off well, others don’t. It’s great to see portfolio companies take it seriously, rather than view it as a tick box exercise as I think there is real value in this.”
Independence and rigour are amongst the biggest benefits but establishing good governance without blocking fast paced decision making and value creation activities is of course critical. Lindsay Dunsmuir, CFO at Azzurri Group, has previously worked with a Chair of Audit in a PE backed context and agrees that: “A move to the Chair of Audit role becoming more recognised in the PE context makes sense from a compliance but also value-add perspective. It should be someone who is a qualified accountant, genuinely independent and can act as a true sounding board to the CFO.”
PE investors apply significant scrutiny to their businesses which can increase when preparing for an exit strategy. The pressure and demands placed upon CFOs in this environment are therefore great. While this can become second nature to the more proven PE CFOs, it can be an incredibly steep learning curve when experiencing PE ownership or the role of Group CFO for the first time. Operating as a mentor can be an incredibly rewarding way of giving back and passing on learnt wisdom. It’s also a great way of providing investors with the confidence to take the leap of faith with up-and-coming talent, who have historically been passed over in favour of the proven CFO. “Establishing a strong Chair of Audit and CFO dynamic can be transformative to a business. CFOs generally find it advantageous to have someone to help them through the big business issues and challenges, particularly someone who isn’t a stranger to the business,” said Wai Au, Chair of Audit at Ascot Lloyd, an Oaktree portfolio company.
The IPO market has opened up tremendously this year and it’s likely this could result in greater demand for Chairs of Audit who can support the private to public transition. In this scenario, aligning board composition to business goals is mission critical and key to creating value. Wai Au agreed: “In an IPO situation, a Chair of Audit is crucial in terms of underwriting revenue streams and the numbers. When it comes to an exit process, a Chair of Audit’s depth of knowledge, understanding and credibility can go a long way.”
Today we’re also seeing a lot of private equity interest in the high yield bond market. Businesses taking advantage of a high yield bond on the London Stock Exchange will have to comply with PLC standards, often triggering the need for a Chair of Audit. Paul Sheriff, CFO at New Day, said: “We are a large PE backed business with a high yield bond on the Jersey Stock Exchange and therefore have a public perception to uphold. Having a Chair of Audit on our board has been good in terms of really honing in on the key judgement areas in the accounts. Often these matters are quite complex, so having someone to bring this to the attention of the board and commit the time to take them on that journey is key. The overall rigour that a Chair of Audit can provide, particularly for a business in a similar position to ours, is so valuable.”
A call for greater diversity in portfolio companies is very prominent, with investors and management teams recognising that diversity helps achieve business edge, a productive board dynamic and positive culture. Clearly, significant progress is still required in this respect, but PE clients are sensibly seeing an independent NED hire as a way to address this. Equally, the PE space can often be viewed as quite closed, and this is a great way for PLC talent to gain access and bring their skill set to bear within an exciting new context.
The emerging theme of hiring Chairs of Audit is one of the more recent tactics PE funds are adopting when going to war against the competition and an increasingly complex market. This sort of hire allows a business to shape the board around specific business needs and mission critical agendas. It goes beyond the typical financial re-engineering of businesses and can add value in a whole host of ways.
While hugely beneficial to businesses, this role is rewarding and gratifying for seasoned CFOs ready to take their career to the next stage. As this position is more common in PLCs, it’s one of the few ways in which PLC talent can cross into the PE domain, and therefore a very attractive career proposition to many.
As Private Equity backed businesses continue to be such a major employer in the UK, reform around compliance and governance for the industry is probably inevitable. No doubt this will mean an even greater demand for PE portfolio NEDs will arise.