Reputation management ought to be an area of particular expertise for private equity.
This is, after all, an industry that is supposed to be about creating value – and reputation is a key component of that. Portfolio companies with good brands sell at premium prices; conversely, companies that have suffered brand damage – perhaps by implication in something like the recent horsemeat row in the UK or the tainted milk scandal in China – become a much less attractive proposition. A good reputation can also be a competitive advantage for GPs, particularly when they’re trying to raise capital or build relationships with management teams; again, firms who have suffered from negative coverage tend to have a harder time gaining traction.
However, GPs have not always taken a very sophisticated approach to reputation management – whether that’s their own reputation or that of their assets. Perhaps in keeping with the days when this was a cottage industry that conducted most of its business behind closed doors, firms have often responded to adverse publicity by battening down the hatches and keeping their heads down, in the hope that the story would eventually go away of its own accord – a rather passive approach for an industry that prides itself on being exactly the opposite.
But the problem isn’t going away. In fact, reputation is getting harder to manage these days thanks to the social web, where it’s so much more difficult to control who’s talking about you and how these opinions are disseminated. And that’s forcing every business – including private equity firms – to be far more proactive and assiduous in their approach to managing risk.
Monitor and rebalance
“Fifteen years ago, the board would say: ‘We need a website’. Eight years ago, it was: ‘Why aren’t we at the top of Google?’ In the last few years, it’s been more about: ‘Our site is at the top of Google, but the second result is a false story about us, or a blogpost written by a disgruntled ex-employee,” says Dave King, founder and CEO of Digitalis Reputation, a firm that specialises in helping companies and individuals manage their online reputation.
Digitalis’ basic offering is an online ‘threat monitoring’ service that trawls every search engine in every language in the world looking for any mention of (say) a company’s name or the names of its directors. This allows Digitalis to act as an early warning system for potential online unpleasantness – so instead of being caught unawares when it’s too late, PR teams can formulate a response, or lawyers can swoop on defamatory content.
That’s not the cleverest bit, though. It’s a natural feature of search engines that negative content tends to rank higher then positive content, says King, just because it attracts more attention. But this is bad news for companies, because it means that a blog written by a disgruntled ex-employee, say, will often appear higher in the search listings than a series of positive mentions. So what the Digitalis technology does is help to ‘rebalance the commentary’, as King puts it, by promoting more positive news up the rankings and pushing the negative stuff further down.
This may sound a bit far-fetched. After all, even the least tech-savvy private equity partner will probably be aware that the exact algorithms used by Google et al are closely guarded secrets – and are changed regularly to stop clever techies working out how to game the system.
However, King argues that the kind of thing Digitalis does isn’t the kind of thing Google is trying to prevent; it wants to stop misuse, he says, not people making their online presence more accurate. And just in case you don’t buy that, Digitalis has another trick up its sleeve: the technology is supposedly equipped with an artificial intelligence element that allows it to track changes to the algorithm and adapt accordingly.
Seeing the value
So what use is this sort of product for private equity firms, exactly? According to King, it’s most useful to GPs in four areas. The first is during due diligence, when they’re trying to find out as much as possible about a potential portfolio company and its management team. The second is as part of the monitoring process of its existing portfolio. The third is when they’re preparing to exit a particular asset, and want to be sure it gives off the right impression to potential buyers. And the final scenario is when they’re in the process of fundraising, and want to get a better sense of what’s being said about them online.
Bigger firms are more likely to grasp the value, he admits, particularly since many of them have been investing heavily in their online presence lately. “The larger, more sophisticated firms will recognise at board level that there’s a strategic value in evaluating reputational vulnerability and putting a plan in place to mitigate that.” It’s particularly helpful for firms who deal with distressed assets, he says – which by definition are likely to have endured some bad press.
Smaller firms who deal with growth companies, on the other hand, might not immediately see the value in the same way. As a result, they often won’t call in someone like Digitalis until they’re mired in the fall-out from a reputationally damaging incident – by which point it’s obviously a lot harder to manage.
The reality of today’s world is that private equity firms that are buying well-known businesses of scale are likely to end up with people talking about them – and much of that conversation is going to be happening online. GPs ignore this at their peril.
Drawing the venom: a case study
A European private equity firm that invested in mid-sized businesses across Europe
The GP owned a couple of portfolio companies that had struggled in the wake of the financial crisis: both ended up having well-publicised performance issues, which were having a negative impact on the reputation of the firm more generally. This was particularly troublesome as the firm was about to embark on a new round of fundraising – and at a difficult time, where LPs were only too keen to find reasons to pass on a new fund.
Digitalis focused on trying to promote some of the more positive online information about the firm, in a number of different European countries. This covered a number of different company names (both the firm itself, plus its portfolio companies and their subsidiaries) and also a number of different individuals (both investment professionals within the GP and senior managers within the portfolio). By pushing some of this coverage up the search engine rankings – by focusing on inbound links and so on – it was able to push some of the more negative coverage down the rankings. Subsequently, Digitalis was retained to provide an ongoing service for the GP, so it could continue to try to promote better coverage of the individuals involved in these deals, while also monitoring for new risks.