Private equity should take a global approach to communications
At a recent private equity conference, one speaker suggested that “winter is coming” for the industry. The logic was that private equity firms globally had benefitted from an historic bull market in equities since the Fed began purchasing assets in spring 2009, enabling many GPs (General Partners) to make extremely strong returns for their investors; that current valuations have resulted in very high levels of exits and low levels of deals, with the industry sitting on a mountain of dry powder ($1 trillion by some estimates) and with huge competition for deals; and that it is unlikely that returns from funds currently being raised will be as compelling as those achieved in the post-crisis period.
What this means in practical terms for GPs going forward is that there is likely to be increased investor focus on returns, and perhaps, as with hedge funds, greater downward pressure on fees. There is also likely to be greater competition for capital. And that means that GPs will need to better communicate to investors what makes them different to, and better than, their peers. In other words, they will need to build their brand in the marketplace.
Many private equity professionals think of brand as a retail concept inappropriate for sophisticated investors like pension funds CIOs. But put differently, brand boils down to reputation, which is something private equity professionals certainly do understand. And the fact is that institutional investors overwhelmingly invest in those GPs with well-established, trustworthy brands. At least in part, that reflects the risk-averse culture in these investors. There is a “no-one got fired for buying IBM” approach because of the career risk associated with investments that fail.
It is worth bearing in mind the internal politics within institutions around allocations to alternative investment managers. The CIO will typically understand the industry and advocate an allocation, but people around them such as trustees and investment committee members will often question these allocations.
So GPs need to not only to demonstrate their investment expertise and experience to a CIO audience, but also reassure a trustee audience in terms of trust, transparency, governance, risk management, and commitment to community, social and environmental issues.
The channel by which GPs can do this is their external communications, mainly through press engagement, but also through their website, thought leadership content, social media and conference appearances. In essence, this brand-building is about raising awareness in the marketplace. It should be thought of as an activity which supports traditional capital-raising, but is not an alternative to it. And it should be done in a careful, strategic way that utilises insights and analysis. The larger GPs understand this, and devote significant time and resources to brand-building, often globally across many jurisdictions, because the investor base of the industry is becoming increasingly diverse and international. That is why they dominate capital-raising, but there is also the opportunity for smaller GPs to support their growth in this way too. Digital disruption has meant that that there is a wider range of outlets internationally covering the industry, and that it is cheaper and quicker to produce and distribute content to them.
Brand-building not only supports traditional capital-raising, it also supports deal origination. It is clearly beneficial if the owners of businesses which a GP may target are aware of their areas of focus. And it can also be used to generate greater interest from the market in portfolio businesses – and ultimately to raise the value of those businesses upon exit.
This article originally appeared in The Drawdown.
Written by Christen Thomson, Senior Director