By Anant Deboor, Regional Managing Director, Asia Pacific, Hawthorne
Original Publication: Medium
Date of Publication: February 7, 2019
‘We are a private equity firm — I am not sure why we need to invest in branding and marketing. Our business is face-to-face, we know our clients.’
Something that we often hear of as brand and marketing consultants. On the other hand, research from a 2014 survey by financial services firm, BackBay Communications, among 290 PE partners, agents, lawyers and i-bankers, 98% said it was important. Where’s the truth in this post-truth world? Or perhaps more accurately, which is the more justifiable opinion?
Private equity: a young, maturing industry with an ancient history
PE has always been around, it just hasn’t been called that until modern times.
If you went back to the 15th Century, it would have been a husband-wife venture capitalist team in Spain by the names of King Ferdinand and Queen Isabella who provided seed funding for a chap called Christopher Columbus hoping to find a new route to India. Señor Columbus first made presentations to the King of Portugal, who turned him down after consulting with his advisory team. Over the years, the King and Queen put up more expansion capital as they started seeing some returns — and then convinced investors from other parts of Europe to jump into Project America.
Fast forward to the 1960s-80s, when we witnessed explosive growth among PE firms. From Silicon Valley start-ups funded by venture capitalists through to the infamous leveraged buyout of RJR Nabisco by Henry Kravis and Jerome Kohlberg, Jr — PE firms started acquiring their cavalier (and sometimes dark) reputation, immortalised in pop culture with the book and film “Barbarian at the Gates”.
From small to big: contrasting worlds, bigger challenges
PE firms are generally slotted in somewhere along a scale of size: from small to very, very large. At the smaller end of the spectrum, you typically have the largely self-funded VC firms. The culture tends to be more chaotic — and often driven by a belief in an idea. As most of the firms here are self-funded, the deals they look for are based often based around personal beliefs, capabilities and vision. To the extreme right however, you have the behemoths such as KKR and Blackstone, that look and feel premium corporate. It is the world of big business, huge numbers, management power and aggressive ambitions.
Beyond deal-making: the emergence importance of brand and reputation
While the ability to spot winners, negotiation skills, financial nous and an innate aggression have always been central to the success of PE firms, in today’s market, they can no longer rely on that deal-making prowess alone. In a post-2008 tighter regulatory and more suspicious climate, with the general drying up of easy capital, an increasing number of PE firms — particularly the small and mid-market ones — need to make every deal count. In the cut-throat world of PE, the deal-making — and oftentimes the unsavoury fallout — ends up damaging reputations for the long-term. Just Google the PE fight over the super luxury hospitality brand Aman Resorts, and the impact it had on the Aman brand.
Here are seven lessons in the long-term importance of the brand that PE firms are realising today, lessons that firms such as Deloitte, McKinsey and PWC, and law firms such as Allen & Overy, Linklaters, Clifford Chance and others have realised over the last decades. An importance that is leading to greater ROI on every deal that is at the heart of the PE business.
- Cascading trust: A stronger brand at the heart of the PE business means an ecosystem of greater trust and confidence — and the cascading benefits. Brands are also hugely valuable during times of underperformance, and when working with regulatory bodies. While basic honesty and integrity in deal-making are essential in the VC space, this becomes mission critical as you move to the right of the spectrum above.
- Stronger deal results: For the small and mid-market firms, their PE brand is critical in an external downstream context. This could mean more proprietary deal flow, with fewer auctions. It will mean more calls returned, easier negotiation on term sheets and big insurance against ending up competing on price.
- Efficiencies in attracting the right opportunities: Creating a reputation for a sector expertise, or sustainability, automatically separates you from other firms by attracting the right kind of investment opportunities. For example, Impact Investing has become such an important arena that The Economist estimates it will take an additional $2.5trillion of private investment per year to really tackle the issues of climate change.
- Insurance against financial crises: For the mega firms such as KKR and Blackstone, corporate reputation matters more than ever before. The WPP BrandZ Portfolio of Strong Brands outperformed the S&P 500 by a factor of 2 between Apr 2006 and April 2013. Companies that invested in their brand showed smaller drops during the financial crisis, and rebounded faster and higher after.
- Winning the war for expertise: Most importantly, a strong brand helps in the talent marketplace. A survey by Deloitte once estimated that a 1% drop in talent attrition led to an annual savings of over US$400mn. Toward the right of the spectrum, companies like KKR and Blackstone face fierce competition to hold on to their star fund managers and to continuously attract the best talent.
- The power of the halo effect: The Aman Resorts case is a classic lesson in how not to handle PE deal-making. The impact on the Aman brand is still reverberating, five years on. The stronger your PE brand and reputation, the stronger the halo — both on sources of capital as well on your investment properties. A strong PE brand has a direct impact on the valuation of the very companies it has stakes in — resulting in greater returns.
- Access, access access: A strong PE brand with a sharply defined purpose will open gateways to far more deals of the right kind rather than the ‘spray-n-pray’ approach that many adopt through endless networking events and seminars. Access to sectors, geographies, people and deals happen because your reputation precedes you.PE firms need to translate intent into meaningful action to define and develop their brands and marketing propositions. Being able to articulate a central idea and brand vision and making that work nicely for the business is quite simply a measure of sophistication of the firm — and will stand it in good stead.
Anant Deboor is a specialist in brand architecture/consulting and the Regional MD (APAC) of Hawthorne, a US-based, ROI-led performance marketing agency.