Friday Letter: Building a brand

Almost 20 percent of Blackstone’s total assets lie in good will and other intangibles and that’s before the companies it owns are taken into account. Buyout firms are waking up to fresh ways to extract more value from the brands in their portfolios.  

As The Blackstone Group’s unit price hit a new low this week, the value of its intangible assets and goodwill stood at $2.2 billion – equivalent to some 17 percent of its total assets, according to its most recent quarterly filing to the SEC in January. It is a sizeable portion of total assets, and it underlines the importance to a private equity firm of its intangibles.

And unlike buildings and equipment, this value will not necessarily depreciate over time.

Goodwill, which basically equates to a firm’s reputation in the marketplace – including the value of trademarks, customer and employee loyalty and so on – is typically the most significant of these, and for a company like Blackstone can amount to a sizeable part of its value.

Private equity has woken up to the value of brands. When Bain Capital acquired Dunkin’ Brands in 2006, it took out loans of $1.7 billion secured against the company’s brand name and intellectual property.

And why not? After all, just because these assets are intangible, that does not make them non-quantifiable. Indeed, most leading brand consultants have developed tools to measure the value of a brand, most of which involve detailed modelling of the brand’s future cash flows, discounted against various risk factors to produce a net present value.

With this in mind, the private equity industry should take an active approach to managing its own brands, as well as those of its portfolio companies. Will Blackstone have to write down the value of its goodwill in the wake of the credit crunch and the turn in sentiment against mega buyouts? It seems hard to imagine there has not been some impairment as private equity’s reputation has been tarnished across the board in the last 12 months.

The time is surely ripe for firms to consider once again their collective branding as the shock troops of global capitalism. In the 1980s, the industry managed the transition from “leveraged buyouts” to “private equity” when the former moniker became too freighted with negativity. Last year, The Carlyle Group’s David Rubenstein told PEO he favoured “change capital” for the next metamorphosis of his industry’s branding.

You can see where Rubenstein is going with this. Given the potential economic disruption ahead, an opportunity beckons for the industry to show that it can deploy capital to effect positive economic change in the businesses and sectors it invests in. It’s an opportunity private equity should grab with both hands. If it succeeds, better branding and greater goodwill will be part of its reward.