Charles Dickens' oft quoted aphorism, “It was the best of times, it was the worst of times”, could easily start the next chapter of the private equity history book. Most insiders will agree that the industry is facing a time of uncertainty that is potentially disastrous to its reputation. On the other hand, most will also agree that economic conditions over the next few years could produce some of the best buying opportunities that private equity firms have ever seen. This mix of beleaguered reputation and business opportunity has created a communications quandary for the industry and its general partners – especially those facing the prospect of fundraising – and calls for sophisticated strategies to face the unique challenges. Never before has communicating your firm's brand and reputation been more vital to success.
Consider the following headlines from the mainstream business press:
This type of media environment is incredibly challenging for any private equity firm. While the head of a private equity program at any major pension fund will make it his or her priority to have an “inside baseball” understanding of the asset class, and keep up with industry trends by subscribing to several trade publications, it can not be assumed that the members of the investment board, particularly at large public institutions, will share the same level of interest or insight. In fact, the unfortunate (if controversial) truth is that some prominent LP decision makers cannot necessarily be considered “smart money”. With many billions under their supervision across multiple asset classes, these executives may stay abreast of the asset class only by following the mainstream press, which often is simply an overstatement of industry pros or cons depending on the prevailing views of the public. With this as the only source of information for many decision makers, negativity is to be expected. It is not surprising that many are unnerved by the prospect of diving head first into private equity right now. They feel much more comfortable sitting on their hands until they can see some stability in the marketplace.
The truth is that private equity still has a very strong story to tell. Now more than ever, private equity firms are recognizing that how and to whom they tailor their communications is critical to conducting all aspects of their business – and can be determinant in the fundraising process (and therefore to their very survival). In fact, private equity funds raised in recession vintage years outperform by an average of 300 basis points – and the differential in the top quartile is far higher. While it is true that credit markets are frozen, existing portfolio companies are facing increasing pressure and exits are few and far between. There is no escaping the fact that everything, even the best brands and businesses, is “on sale”. Everyone who has been through several cycles recognizes this as truth: It is always better to buy when assets are available at a discount and when there is less competition for them. A patient buyer will be able to find good companies at great prices due to financial distress, corporate divestitures to satisfy liquidity demands by the parent, baby boomers looking to sell closely held businesses for estate planning purposes and panic selling by weak holders and a myriad of other reasons. Driving this point home to potential LPs is one of the greatest communications challenges facing private equity firms today.
The lifeblood of private equity is fundraising. We have observed over the years how good firms can find ways to put money to work successfully in all environments if and only if they have access to investment capital – a big “if” in today's environment. When even blue chip LPs like Harvard University Endowment are trying to unload their PE portfolios on the secondary market (and the UK's largest charity, The Welcome Trust, has followed suit), it is fair to say we are in the midst of the most competitive fundraising environment in recent memory. Distributions are drying up. LPs are short on cash. The “denominator effect” has placed tremendous pressures on allocations. The few LPs who are willing to invest will be looking for firms whose reputations will allow them to succeed in sourcing deals and obtaining financing in this brave new world.
In fact, reputation is key in this business. Certain recent and high profile (alleged) breaches by private equity firms wherein they walked or attempted to walk away from deals that were in process during the onset of the credit crisis has caught the attention of corporate sellers. In today's environment, sellers are as cautious as LPs, and they want to know a buyer can get the deal done. This is causing sellers to take an extra look at firms' records of conduct. Positioning a firm as a credible buyer, through effective and consistent communications, will go a long way towards reassuring sellers, just as educating LPs can help them understand the opportunity being presented. Firms that have built credibility, that have done what they said they were going to do and are known for it, will be the first to which sellers and intermediaries turn. Likewise, lenders are highly selective. They are still working through the overhang of debt from the heady days of cheap financing in early 2007. Although eventually markets will open and clear, only the most credible cases will be funded for the foreseeable future. Deals that are sponsored by firms that have not established themselves as firms that build value in portfolio companies will struggle to find financing. Finally, when it is time to exit an investment, serious buyers will always appear at the table with firms that have a reputation for building longterm value in their portfolios.
One example is a private equity firm we observed that identified franchise businesses as a sector of focus, but had achieved only mixed-to-moderately positive results within those businesses. Targeting key influencers in the restaurant and franchise space, including trade publications, the firm sought to use firm milestones as opportunities to build relationships. Leveraging these relationships later, the firm placed several high profile articles in leading industry publications and became a go-to source for commentary. This fall, the firm sourced its largest investment to date in the space, having generated significant support from the seller based on certainty of closing and credibility as a value-added steward of the business.
So, what does it take to communicate successfully in this challenging economic environment? What can a GP do to proactively manage its reputation at a time like this?
1. First and foremost, don't panic. LPs will be looking for 1. humble but steady hands and confidence in your ability to act as a steward of their investment throughout the recession. Firms that take affirmative steps to specify goals or plans addressing the downturn, reiterate the firm's philosophy and dedication to its model, and provide an open channel of communication between themselves and the LP may instill just the confidence investors need to re-up or sign up for the next fund.
Effective communications strategies vary among GPs about as broadly as the composition of their portfolios, but one thing is certain: This is an environment of exceptional opportunity for those strong enough to capture it. Those firms that can highlight this by consistently outlining a distinctive value creation approach to all key constituencies will be well rewarded for their efforts. The firms that succeed in building a comprehensive communications programme will find they possess a real competitive advantage in an environment where the only certainty is volatility – and when the market rebounds they will find they have put some distance between themselves and the competition.