/ 2017 PRIVATE EQUITY CFO SURVEY. VARDIS / PRIVATE EQUITY CFO SURVEY PAGE 1

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1 / 2017 PRIVATE EQUITY CFO SURVEY VARDIS / PRIVATE EQUITY CFO SURVEY PAGE 1

2 VARDIS 2017 PRIVATE EQUITY CFO SURVEY OVERVIEW : DURING OCTOBER 2017 (FOLLOWING UP ON ITS 2016 SURVEY), VARDIS CONTACTED THE CFOS OF 925 NORTH AMERICAN PRIVATE EQUITY PORTFOLIO COMPANIES TO REVIEW JOB CONTENT, DIFFERENCES BETWEEN PRIVATE EQUITY AND TRADITIONAL CORPORATE FINANCE ROLES, COMPENSATION AND EXPECTATIONS. THOSE SURVEYED REPRESENT THE FULL SPECTRUM OF PRIVATE EQUITY PORTFOLIO COMPANIES AND INVESTORS IN SIZE, INDUSTRY, GEOGRAPHY AND INVESTMENT STYLE. WE ARE PLEASED TO SHARE THIS OVERVIEW WITH YOU. / Questions & further information: Should you have questions or want further information on this or Vardis other surveys, please feel free to contact a Vardis consultant in any of our offices at / About Vardis: Vardis is an international executive search firm focused strictly on the Private Equity market. The firm supports investors in N. America, Europe and Asia on senior level recruitment (CEO, CFO, Board Directors, etc.) and in Pre-Deal situations through the introduction of Advisors, potential Board Members and Operating Executives. VARDIS / PRIVATE EQUITY CFO SURVEY PAGE 2

3 / 2017 SURVEY HIGHLIGHTS It s a good time to be a CFO Demand for experienced CFOs driving compensation increases Equity grants increasing sharply Base salaries up 6% overall and expected bonus up 13% over 2016 Average Cash Comp now over $350,000 for companies under $500M revenue and over $650,000 for companies over $500M Base case grants up 25% over last year with gain of 45% for those in companies under $500M in revenue Typical equity grant range for PE CFOs now $2.25M - $5M PE CFOs are different PE CFOs are Experienced Specialists They are builders and transformers Fewer than one-third are first time CFOs and 42% have been a PE CFO before 56% have been in their current roles less than 3 years They understand the different demands - Close board oversight, greater debt levels and the expectation to outperform the broader market They are comfortable building new operating systems, metrics and business processes They build high performing teams 88% made changes to their teams The CFO role is changing Outsized returns require organization transformation and data More than just the numbers PE has moved beyond financial engineering. More than two-thirds of CFOs work with investors with a formal operating partner organization. CFOs are the analytical engine for transformation and decision support 2/3 will invest in FP&A and over 40% in Financial IT and Big Data in 2018 More than half of CFOs are also responsible for IT, Legal and Human Resources and onequarter responsible for Supply Chain, Purchasing and other functions such as Operations or Customer Services VARDIS / PRIVATE EQUITY CFO SURVEY PAGE 3

4 / PRIVATE EQUITY MARKET OVERVIEW Operating Partners on the increase Two-thirds responding work with dedicated operating partners One-third employ full-time operating partners and/or finance experts Hold times trend downward Shifts in industry activity General stability (despite disruptions in key verticals, currency swings, Brexit, etc.) 42% expect exit in two years and only 14% expect an exit to take four years or more Tech and Healthcare no longer strictly VC/Growth markets. Tech/HC now 23% of all deals. Amazon effect results in Retail and Consumer deals representing just 9% of the market. 76% of companies are operating within the margin (performing as expected, somewhat worse or somewhat better than expected) though underperformers lead outperformers by a margin of 5:2 Debt Market Confidence General buoyancy has contributed to a confidence in PE CFOs. Only onethird (34%) of respondents consider their current debt level as aggressive though 59% have debt of at least 4x trailing 12 months EBITDA. VARDIS / PRIVATE EQUITY CFO SURVEY PAGE 4

5 / THE PRIVATE EQUITY CFO Experienced & Specialized Fewer than a third are first time CFOs and 42% have been CFOs of PE-backed companies More than half (56%) have been in their current role less than 3 years Most common hiring criteria include; Industry experience, PE experience or other specialization such as Turnaround experience Numbers just the starting point Operationally astute, comfortable developing new business models, processes, and systems Over half of respondents also lead HR, Legal, IT More than one-quarter are responsible for other functions such as Supply Chain, Operations, Customer Services, Purchasing The Job is Different PE CFOs are Different Comfortable with close oversight - 58% report at least weekly investor contact and 28% multiple contacts per week Comfortable with leverage - Two-thirds describe their company s debt as very low or average despite average debt multiple of 4-5X Enjoy Building Teams - Comfortable coaching, recruiting, developing high performing teams. 88% hired new talent. 45% work in a city different from their last role Half of those elect not to relocate and are commuting on a weekly or similar basis Road Warriors The Job is Changing Finance Drives Transformation and Decision Support Over 2/3 of CFOs expect to invest in additional FP&A resources in % expect to invest in Finance IT and Big Data resources in 2018 VARDIS / PRIVATE EQUITY CFO SURVEY PAGE 5

6 / PRIVATE EQUITY CFO COMPENSATION PE CFO Compensation Outpacing General Market Continued Compression between PE CFOs and Public Company Counterparts PE CFO Base salaries up 6% overall with double digit gains in some segments Annual expected bonus payments up 13% over 2016 Average Cash Comp greater than $350,000 for companies under $500M revenue and over $650,000 for companies over $500M Virtual Parity Between Private Equity and Public Counterparts Emphasis on variable, pay-for-performance compared to Public companies paying off for PE CFOs Expected PE bonus outperforms public counterparts by 2:1 Equity base case grants have increased by almost 25% with average CFO expecting payout of $2M- $5M Strongest gains at lower end of market where small company market has seen biggest gain of almost 70% from $1.3 to $2.2M with 30% gain for $100-$500M companies The gap between small and large company CFOs (and CEOs, too) is narrowing Cash for Equity is out of fashion 76% get the same or more in joining new company Average new compensation includes a cash increase of 6% VARDIS / PRIVATE EQUITY CFO SURVEY PAGE 6

7 / CFO CASH COMPENSATION BY COMPANY REVENUE 700 Annual Cash Compensation (X$1,000) Base Bonus Equity Grant Value 2016/2017 (X$1M) 2016 Grants 2017 Grants PE Public PE Public PE Public PE Public <$100M $100M-$500M $500M-$1B $1B-$5B Rev. < $100M $100M - $500M $500M - $1B Rev. > $1B VARDIS / PRIVATE EQUITY CFO SURVEY PAGE 7

8 / SURVEY RESPONSES VARDIS / PRIVATE EQUITY CFO SURVEY PAGE 8

9 / SURVEY RESPONSES: SECTION I, INVESTOR PROFILE 1 Your investor's investment style can best be described as: 2 The size companies in which your investor typically invests are best described as: 62% 49% 36% 9% 16% 12% 3% 4% 9% Venture Capital Growth Investor Buy Out Turnaround/ Distressed Early Stage/ Start Up Late Stage/ Growth Lower Middle Market ($25M - $200M) Middle Market ($200M - $1B) Large Cap ($1B+) 3 Your investor s typical hold period is: 4 Which of these best describes your investor's operations model? Less than 3 years 1% My investor does not have a dedicated portfolio operations group or operating executive organization. 32% 3-5 years 55% My investor has a team of former operators that serve as board members of the firm's portfolio companies. 32% 5-7 years 40% My investor has an internal operations group which works closely with its portfolio companies. 26% More than 7 years 4% My investor has an internal operations group that includes finance and accounting experts who play an active role in its portfolio companies. 10% VARDIS / PRIVATE EQUITY CFO SURVEY PAGE 9

10 / SURVEY RESPONSES: SECTION II, COMPANY PROFILE 5 What is your Company's annual revenue? 6 How many employees at your Company? More than $1B $501M - $1B $101M - $500M Less than $100M 1,000-5,000 More than 5, Less than Which best describes your Company? Domestic - less than 15% of revenue and operations outside of NAFTA region. 68% International - between 15 to 30% of revenue and operations outside of NAFTA region. 13% Global - more than 30% of revenue and operations outside of NAFTA region. 19% VARDIS / PRIVATE EQUITY CFO SURVEY PAGE 10

11 / SURVEY RESPONSES: SECTION II, COMPANY PROFILE 8 Where is Company Headquarters? 9 What industry best describes your Company? Business Services/Financial Services 19% Industrial Services 7% Technology 17% Manufacturing 19% Distribution/Transportation 9% Healthcare 7% Retail 1% 27% 14% 14% 18% 23% 4% West Coast Mountains Southwest Midwest Southeast Northeast Consumer Products/Services Other 8% 12% VARDIS / PRIVATE EQUITY CFO SURVEY PAGE 11

12 / SURVEY RESPONSES: SECTION II, COMPANY PROFILE 10 What is the most likely exit for your current investor? 11 When do you anticipate an exit? 54% 36% 44% 10% 22% 19% 14% Trade Sale/Strategic Buyer Public Offering Another PE Investor Within the next 12 months. 12 to 24 months from now. 24 to 48 months from now. More than 48 months from now. 12 How have operating results and value creation compared to the initial investment thesis? 38% 13% 22% 16% 11% Much lower than expected. Somewhat lower than expected As expected. Somewhat better than expected. Much better than expected. VARDIS / PRIVATE EQUITY CFO SURVEY PAGE 12

13 / SURVEY RESPONSES: SECTION II, COMPANY PROFILE 13 How would you describe your Company's level of debt? 14 For its most recent reporting period, what was the approximate multiple of debt to trailing 12 months EBITDA? Aggressively leveraged Very low More than 6 times Less than 2 times 2 to 4 times Average debt level for the business and industry 4 to 6 times VARDIS / PRIVATE EQUITY CFO SURVEY PAGE 13

14 / SURVEY RESPONSES: SECTION III, CFO ROLE Other than finance & accounting, what other roles report to you? 15 (check all that apply) 16 What were the key factors in your hiring? (check all that apply) 58% 56% 54% 39% Most Common Other responses; Administration Facilities Operations Sales Forecasting Pricing I was already here 10% I knew the investor 22% I knew the CEO 20% I was recruited based on industry experience 11% I was recruited based on previous private equity experience 38% Prior Private Equity "Exit" experience 46% Prior IPO experience 43% Public Reporting Experience 19% "Big 4" Accounting Experience 15% Other (please specify) 21% 17 What best describes your previous experience? 27% 21% I was CFO of a private equity backed company I was a CFO of another company 26% 42% I was a corporate finance executive (e.g. Corporate Controller, Treasurer, etc.) in a private equity backed company I was a corporate finance executive (e.g. Corporate Controller, Treasurer, etc.) in another company 6% 10% IT Legal Human Resources Purchasing Supply Chain Other (please specify) I was a divisional CFO of a private equity backed I was a divisional CFO of another company 2% 15% VARDIS / PRIVATE EQUITY CFO SURVEY PAGE 14

15 / SURVEY RESPONSES: SECTION III, CFO ROLE If this is your first experience in a Private Equity backed company, how does it compare to your previous role in the following categories? On average, about how often do you have contact with your investor? Expected Knowledge of Detail 56% 32% 12% 30% 28% Cash Management 37% 29% 34% 25% Lender Involvement 34% 41% 25% Pace of Change 32% 37% 31% Reporting 29% 42% 29% 13% Board Involvement 25% 36% 39% Quality/Size of Team 22% 47% 31% 4% Leverage 21% 28% 52% No Change Different Significantly Different Multiple times each week. Once per week. 2 to 3 times per month Once per month. Less than once per month. VARDIS / PRIVATE EQUITY CFO SURVEY PAGE 15

16 / SURVEY RESPONSES: SECTION III, CFO ROLE After joining your current employer and assessing your team, which statement is most accurate in retrospect? In what areas are you mostly likely to invest during the coming 12 months? (Check all that apply.) 66% 50% 38% 37% 42% 29% 19% 15% 13% 14% 8% 1% 3% I didn't need to make any changes. I didn't make any changes but should have. I made changes quickly. I made changes gradually. I made change too slowly. Financial Control FP&A M&A Audit & Risk Tax Treasury Shared Services Financial IT VARDIS / PRIVATE EQUITY CFO SURVEY PAGE 16

17 / SURVEY RESPONSES: SECTION III, CFO ROLE 22 How long have you worked for your current organization? 23 Which of the following best describes your situation; More than 6 years Less than one year My current position is in the same city as my former role. 55% 4-6 years 1-3 years My current position is in a different location and I relocated. My current position is in a different location. I maintained my previous residence and "commute" on a weekly or periodic basis to the new location. 24% 20% 24 How does your current cash compensation (base & target bonus) compare to your last role? Higher by 20% or more Lower by 20% or more Lower by 5-20% Higher by 5-20% About the same VARDIS / PRIVATE EQUITY CFO SURVEY PAGE 17

18 / SURVEY RESPONSES: SECTION IV, CFO COMPENSATION BASE SALARY 25 What is your current base salary? <$100M $100M-$500M 62% 31% 38% 33% 26% 23% 22% 16% 0% 0% 0% 0% 17% 6% 4% 2% 0% < >600 < >600 $500M-$1B $1B+ 8% 8% 43% 50% 29% 3% 1% 0% 7% 14% 7% 0% 0% 8% 8% 8% 17% 8% Up to $250,000 $251,000 - $300,000 $301,000 - $350,000 $351,000 - $400,000 $401,000 - $500,000 $501,000 - $600,000 More than $600,000 < >600 < >600 VARDIS / PRIVATE EQUITY CFO SURVEY PAGE 18

19 / SURVEY RESPONSES: SECTION IV, CFO COMPENSATION ANNUAL BONUS 26 What is your current target annual bonus? 36% <$100M $100M-$500M 44% 16% 26% 30% 26% 2% 0% 0% 4% 12% 12% 12% 0% 17% <20% >70 <20% >70 16% 16% 13% $500M-$1B $1B+ 8% 9% 43% 29% 33% 33% 2% 0% 7% 0% 14% 7% 0% 0% 0% 17% 17% Up to 20% 21-30% 31-40% 41-50% 51-60% 61-70% Over 70% <20% >70 <20% >70 VARDIS / PRIVATE EQUITY CFO SURVEY PAGE 19

20 / SURVEY RESPONSES: SECTION IV, CFO COMPENSATION EXPECTED BONUS 27 What do you expect your actual annual bonus to be this year? <$100M $100M-$500M 46% 27% 21% 14% 16% 16% 4% 4% 0% 19% 13% 12% 23% 6% 12% 15% <20% >70 <20% >70 $500M-$1B $1B+ 13% 13% 12% 8% 7% 43% 36% 33% 0% 7% 7% 7% 0% 17% 8% 8% 8% 8% 17% Up to 20% 21-30% 31-40% 41-50% 51-60% 61-70% Over 70% <20% >70 <20% >70 VARDIS / PRIVATE EQUITY CFO SURVEY PAGE 20

21 / SURVEY RESPONSES: SECTION IV, CFO COMPENSATION BASE CASE EQUITY 29 If your equity delivers against the mean expectation of the investment thesis, what gross proceeds do you expect at exit? <$100M $100M-$500M 31% 21% 19% 19% 19% < m 10% 10% 2% 2% 1 to 2 2 to 3 3 to 4 4 to 5 5 to 7.5 6% >7.5 12% 10% 18% 22% 10% 8% < m 1 to 2 2 to 3 3 to 4 4 to 5 5 to % 8% >7.5 $500M-$1B $1B+ 12% 11% 10% 9% 12% 6% 0% 0% 7% 36% 14% 0% 14% 29% 0% 0% 8% 25% 0% 17% 17% 33% Up to $500,000 - $1.01M - $500,000 $1M $2M $2.01M - $3M $3.01M - $4M $4.01M - $5M $ $7.5M More than $7.5M < m 1 to 2 2 to 3 3 to 4 4 to 5 5 to 7.5 >7.5 < m 1 to 2 2 to 3 3 to 4 4 to 5 5 to 7.5 >7.5 VARDIS / PRIVATE EQUITY CFO SURVEY PAGE 21

22 / SURVEY RESPONSES: SECTION IV, CFO COMPENSATION EQUITY 28 Did you invest your own capital in the Company? 30 How does your equity vest? Time based only 11% Yes, more than one year's base salary Yes, less than one year's base salary No Time based with acceleration at liquidity 31% Performance based (e.g., above a performance threshold) only 5% Performance based with acceleration at liquidity 6% Blend of time and performance 6% Blend of time and performance with acceleration at liquidity 41% 31 How do you perceive your remuneration package compared to the market? 64% 31% 5% I believe I am below market I believe I am at market I believe that I am above market VARDIS / PRIVATE EQUITY CFO SURVEY PAGE 22

23 / VARDIS BOSTON 800 Boylston Street, 16th Floor Boston, MA 02199, United States DALLAS 100 Crescent Court, 7th Floor Dallas, TX 75201, United States FRANKFURT Friedensstrasse Frankfurt, Germany HONG KONG Level 19, Two International Finance Centre, 8 Finance Street Central, Hong Kong LONDON The Gridiron Building, One Pancras Square, London, N1C 4AG, United Kingdom NEW YORK 250 Park Avenue, 7th Floor, New York, NY 10177, United States VARDIS / PRIVATE EQUITY CFO SURVEY PAGE 23