Friday Letter 10 things private equity must get right

It’s been a terrible few months for the public image of private equity – on both sides of the Atlantic. Attacked by the unions, heckled by the press and lambasted by politicians, the beleaguered industry is facing a tax and regulatory clamp-down. So what can it do to win back some friends? Here are our top ten recommendations:  

It’s been a terrible few months for the public image of private equity – on both sides of the Atlantic. Attacked by the unions, heckled by the press and lambasted by politicians, the beleaguered industry is facing a tax and regulatory clamp-down. So what can it do to win back some friends? Here are our top ten recommendations:

1. Open up and market yourself:

If you’re a big buyout firm, you need to build a mainstream brand, presenting yourself as a positive force building better companies. Otherwise you’ll continue to be seen as a shadowy investment group. Start by improving your website – some of the biggest firms in the industry have sites that would embarrass a start-up. A lack of detail suggests you’ve got something to hide.

 

2. Don’t rise above it:

Be sure to vigorously and systematically challenge those who casually proffer private equity stereotypes – for instance that the only buyout strategy is to “strip and flip” a company and destroy pension and healthcare benefits in the process. A stereotype is only changed when it is unambiguously countered each time it surfaces. GPs have thought themselves above addressing the “strip and flip” label – now it is starting to stick.

 

3. Divide to conquer:

Private equity is a broad church, and the different segments of the market have very different characteristics. Subtle distinctions are not well-suited to the hurly-burly of select committees and mainstream media coverage, but at legislative level it could be a different story. EVCA has already divided its lobbying efforts into three groups – venture, mid-market and large buyout – it is surely only a matter of time before the national associations do the same.

 

4. Democratise your investor base:

Give the man on your street the chance to invest in your funds, perhaps through some kind of mutual fund side vehicle. That will not only increase brand awareness, but also help to dispel the impression that the only beneficiaries of your success are faceless US pension funds or uber-rich individuals.

 

5. Get the staff involved:

When you’re buying the business, get the workers around the table. When KKR and Goldman Sachs bought German forklift truck business Kion last year, the workers council and union were involved throughout the negotiations – and when the deal closed, everyone was right behind it. Then on day one, spend time on the shop floor telling the staff what you’re going to do. Get them excited about the strategy.

 

6. Share the upside:

Employee co-investment schemes are definitely the way forward. Staff at Saga who invested £20 in the Charterhouse buyout three years ago now own a stake worth £10,000 in Saga/AA, which has made it more difficult for the unions to criticise the merger. Incentivise managers too, but focus on lucrative option deals rather than huge salaries and bonuses – that way you can ensure that wealth created is extracted at the right time.

 

7. Talk to the press:

Get to know the journalists who matter to your business; whose opinions can affect the industry’s public perception. Build relationships: have the courage to talk to them off the record on a one-to-one basis, and talk to them on the record whenever possible. That way, they’ll be less inclined to put the boot in when times are tough.

 

8. Get serious about in-house communications:

Some large firms don’t even have an internal communications department. Others do, but it is invariably tiny relative to their size and influence – however good the people are, they can’t be expected to work miracles. And when you hire people, make sure they do actually communicate – we know of at least one buyout house in London where the comms officer seems to have a policy not to talk to journalists.

 

9. Look after the pension scheme:

Pensions are an emotive and politically charged issue, so go out of your way to get it right early in the process. It can pay dividends: after KKR agreed to contribute £1 billion to the Alliance Boots pension fund over 10 years, chairman Nigel Rudd said the company’s pension scheme was now more secure than ever.

 

10. Give something back:

Channel some of your rewards into good causes, and when you do, don’t be afraid to shout about it – the generosity of many leading practitioners goes largely unnoticed. In Europe, the EVPA and the Private Equity Foundation are a good start, but it should be the tip of the iceberg.