As GPs struggle to find assets on the cheap, branding is increasingly seen as a way to create the growth necessary to warrant the cost. But what are the integral components to deriving ROI from portfolio company branding? CompleteSpectrum’s CEO Phillip McMillan and executive vice-president Matthew Stein have worked with a number of private equity firms and their portfolio companies to deploy brand strategies that drive top-line growth and ROI. We sat down with them to discuss how to make branding work for the unique needs of the asset class.
In your experience, how are GPs thinking about brand equity now?
Phillip McMillan: Broadly speaking, branding isn’t part of their playbook, when they should be seeing it as an untapped source for growth in many investments. The effort should start with an assessment of each and every one of their portfolio companies. Then they should use that information to develop road maps and strategies to go to market more effectively.
Take buy-and-build platforms, which are popular these days. There are a lot of forks in the road, a lot of decisions to make on how best to integrate those companies quickly, and in a way that makes them more than what they were individually.
We spend a lot of our time on the M&A side, and work with how best to brand that platform in a way that encourages more acquisition opportunities and drives growth objectives as the platform is built out. A lot of acquisition targets will accept a lower multiple from a buyer, in order to partner with a platform that has a vision for their enterprise.
Matthew Stein: Whether it’s the first buy or the 12th bolt-on acquisition, private equity firms have to pay attention to how these platform companies are seen in the market. But they also have to heed how the brand is communicated to staff and future acquisition prospects.
Why does it matter how the brand is communicated to staff?
MS: In-house talent is critical to representing a company’s brand in the marketplace. They touch the customers directly and bring the brand to life. As things shift in terms of brand, they need to be kept up-to-date so they’re able to stay aligned with the strategy that’s devised in the C-suite.
PM: And that in-house talent is often part of the value of any acquisition. The brand has to be communicated to the staff of a target, to keep them excited about the change in ownership. Otherwise, they’ll start looking for opportunities elsewhere and in this job market, they’ll probably find them.
Over the life of an investment, when should GPs look at brand equity issues?
MS: The best time is prior to signing the deal, so brand-centric data like market perception and customer purchasing preference becomes part of the decision-making process on whether to go forward. There’s also an opportunity if new leadership is introduced to a portfolio company, or when the deal team is devising the first 100 days’ plan.
I’d add that every time they explore a bolt-on acquisition, they should look at their brand strategy.
Beyond the initial due diligence phase, an annual pulse check on a company’s brand equity is worth doing. It’s not always to make changes. Sometimes it’s to report back the success of current efforts or to align to new bolt-on opportunities in the acquisition pipeline. Then when planning for the exit, it’s critical to take a look at the market and what investors are spending on, and align the branding to that.
Some GPs may assume they already focus on branding. How does this kind of brand strategy review differ from their existing efforts?
PM: A lot of firms may include a generic brand survey as part of market diligence to help with the valuation, but that tends to focus on the risk. But they aren’t looking for the opportunities.
We’re looking for untapped value here. We’re looking at integration of, say, multiple brands. What are the costs, but what are the opportunities to access new verticals? Our processes are built around growth and how to build awareness so that brand strategy creates value.
We always aim to ask questions that get answers that drive a concrete action. At its best, branding is about understanding how a company is perceived by the market and shifting strategies to meet or exceed those expectations.
It’s about heeding the reality of how the market sees them – and finding opportunities to expand the reach.
Can you give an example of what this strategy looks like in practice?
PM: We worked with one organisation that through an aggressive buy-and-build strategy accumulated 32 different brands in one platform over just 12 months. The first step was to try to understand how the market saw that platform organisation. The reality was the platform had no identity of its own.
And for a private equity-backed company, that’s a serious liability. To be able to exit that investment, they have to convince a strategic buyer, or other financial investors, or the public markets, that this platform makes sense, as built.
So, we devised a strategy that reduced those 32 identities into four key brands, with a simple tagline that explained what that parent company did for those four brands. We easily measured the value, quantitively, through subjective studies of how people articulated the brand. And then we made sure that everyone, both inside the company and out in the market, understood that new identity through a robust go-to-market strategy.
Can GPs tackle this in-house?
MS: Most of our work is in the middle market and we rarely see this kind of expertise there. Brand equity work like this requires rolling up research and data points into actionable insights. And what the vast majority of in-house marketers do is focus on things like traditional lead generation. This is a very different flavour of marketing that translates consumer interactions, preferences, desires and competitive sets into new tactics to go to market.
PM: And that requires a team. There needs to be a digital marketing person who understands that realm and then a customer branding expert and another one that understands analytics. Specialised branding firms can offer that, but a smaller middle market company might not. And honestly, GPs need to look at opportunity cost. What isn’t getting done because someone at the firm or inside the portfolio company is focused on a branding initiative? And can they think outside the box of “what has been done” versus “what should be done”?
How do you tailor a branding strategy specifically for private equity?
PM: Every day, decisions get made that reflect the relatively short-term holding time of private equity. There are branding opportunities that require a long runway, but that investment won’t make sense if the payoff is years down the line.
The best branding strategy is about preparing firms for their next stage – whether they go public, or are bought by a strategic, or jump up to a larger fund, there must be a branding message that will resonate in those management presentations. Tapping brand equity can certainly help top-line growth, but the best strategies move the needle in terms of enterprise valuation as well.
This article was sponsored by Complete Spectrum and first appeared in the Operational Excellence supplement that accompanied the October 2018 edition of Private Equity International.