Gary McGaghey, the managing partner at Arden Creek Capital and former CFO of two private equity-backed companies, has more than 20 years of experience in finance and accounting. Before joining Arden Creek, he served as CFO at PME Manufacturing and Alliance Laundry Systems.
In this article, Gary will explain some of the most critical accounting commitments private equity firms should meet during the investment stage. He will also share his thoughts on what makes a successful CFO in a private equity firm and how to succeed in public markets and finance.
Private EquityEquity is one of the riskiest endeavors an investor can engage in–but with proper preparation, it can lead to high returns. Acquiring companies and holding them for a few years until they are healthy enough to be sold is a long and complicated process. Unfortunately, it’s harder still when the private equity firm’s finances are not in order. To mitigate the risks of private EquityEquity investing, firms must be prepared to fulfill all of their accounting commitments and meet the following two critical accounting dates:
- Year-End Close: Private equity firms must strive to meet their yearly budgets by finalizing total income and expense figures by December 31st. It ensures that all periods in the fiscal year have been accounted for and that there will be no surprises at the end of the fiscal year (a month or so after closing a new investment).
- Distributions: To be tax efficient, private equity firms must also make distributions by December 31st. It is to distribute their taxable income (interest expense, depreciation, amortization, carried interest) while still in the 15% tax bracket. Suppose a firm waits until after January 1st of each year to make these distributions. In that case, the carried interest will fall into the higher capital gains tax bracket–which could lead to onerous tax consequences for another calendar year. It can strain cash flow and cause financing issues down the road.
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