Last week's Friday Letter suggested that mid-market firms might have a better chance of winning the PR battle if they formed their own lobby group, in order to distinguish their message from that of the larger firms – particularly around growth and job creation. Some readers wanted to know if our implication was that the larger firms don't actually have a good story to tell; or even that they don't have a good reason to exist in the way smaller firms do.
The short answer is: no, we weren't implying that; only that the messaging of these two groups was potentially different, and thus might be better served by two distinct voices. We'd argue that large firms absolutely have a reason to exist – and they also have a good story to tell, even if they haven't always done so particularly well.
Part of the problem is that these two things can sometimes be in tension with each other. For instance, one of big private equity's most important functions in the corporate world is to provide a better level of corporate discipline for flabby, underperforming companies – which might mean changing management, reducing head count and cutting costs. Arguably, this is an essential part of the 'creative destruction' that enables resources to be better allocated around the economy. But the chances of ever turning it into a positive PR story are small. Moreover, large firms typically buy large-cap companies, which as discussed last week tend to grow more slowly and create fewer jobs. This makes it harder for sponsors to focus on the growth theme in their messaging strategy.
Harder, but not impossible. On the very day last week’s Letter went out, there were two great examples of deals in Europe where big firms had used their investment nous and resources to turn local businesses into international success stories. In the UK, the Blackstone Group floated Merlin, the group that operates tourist attractions including Legoland and Madame Tussauds. When Blackstone bought into the original business in 2005, it was making £50 million revenue a year. Now, several acquisitions and much growth later, it’s making more than £1 billion a year; its London stock market listing valued it at £3.2 billion.
On the same day across the English Channel, the Carlyle Group and Cinven floated Numericable, a slightly less glamorous but similarly impressive cable business: the offering was ten times oversubscribed and could raise as much as €750 million, making it the biggest IPO in France for nearly four years. Here, Cinven had led a consolidation of smaller operators to create a national champion of scale – a common investment strategy at this end of the market.
Clearly success stories like these are an excellent refutation of the notion that big buyout firms are all about cost-cutting and asset-sweating. Nonetheless, we’re not convinced it’s a good idea for the bigger firms to focus on jobs and growth in their public messaging. Sometimes a successful investment will create jobs, sometimes it won’t. Why try to focus attention on a performance indicator that you can’t consistently deliver against, and isn’t necessarily a good indicator of investment success?
What the right metric might be is probably for the PR experts to answer. But two potentially fruitful areas jumped out at us from the headlines that day. The first is around the sheer quantum of cash that these firms are generating for their LPs at the moment. Cinven's assertion that it had now generated over €1 billion in capital gains from its recent IPOs reminded us of something CalPERS told us recently – that its private equity portfolio generated almost $10 billion in cash proceeds last year. Where else are state pensions going to get cash-back like that?
And speaking of pensions, the other salient point was the news that the New York State Common Retirement Fund had committed $500 million to Blackstone’s Tactical Opportunities fund, joining other big LPs like CalPERS, New Jersey and Oregon. This is the pot (now more than $4 billion in size) that the Blackstone team can invest opportunistically in anything that falls outside their normal private equity remit but might make them a 15 to 20 percent return.
One of the things that’s interesting about this product is the sheer breadth of its remit, in a world where tighter investment mandates are very much in vogue. Could this presage a world where big LPs increasingly leave it to the big asset managers to work out how and where to deploy their capital, rather than trying to rely on a consultant’s arbitrary asset allocation plan from five years previous? It’s plausible – and if it does happen, these big firms will play an ever more vital role in ensuring that pensioners actually get their pensions. If there’s not a good PR story in that, there’s no hope for them.