Forgive me for sounding like a broken record, but private equity is taking a beating in the press – again. This time, the story being told is private equity firms “preying on companies with reduced valuations resulting from the pandemic.”
Whilst the battlefield has changed, the tactics are the same: private equity is thrust squarely in the crosshairs for supposedly burning and churning companies, hurting employees and markets in the process.
Why is Private Equity so Frequently Targeted?
The perceived issues are numerous, but many of them stem from financial crises in the first decade of the millennium. In 2000-01, private equity received considerable blame for both the overinflated valuations of Internet-driven companies as well as for profiting off of the scraps. In 2008, massive deregulation in the financial sector – which private equity benefited greatly from – played a significant role in the greatest financial crisis in modern history.
We can debate endless nuances of private equity’s involvement in the crises that I’ve spelled out. However, the end result is similar. Public trust and favourability in the financial sector diminished, and private equity – seen as not only a creator but a negligent benefactor of economic downturns – has been a popular target ever since. Subsequent media and political scrutiny has opened new wounds, such as tax loopholes, for naysayers to prey on and are popular flashpoints for readers and constituents.
The adage that perception is reality applies here. So how have we reached this point? There are plenty of well-reasoned, impartial voices that acknowledge that private equity is a job creator, an innovation catalyst, and a winning investment for institutions such as pension funds and university endowments that benefit society greatly. However, these are the quiet voices in the room, drowned out by negative connotations like the aforementioned examples.
How do we Shift the Narrative?
In any situational analysis, it’s important to look inward first. Private equity, for far too long, has been silent. There’s a certain nobility to “just getting on with things” and not sticking your head above the parapet, and it’s understandable given the high stakes and necessary levels of secrecy that exist with institutional investing. However, we must acknowledge that disinformation tends to fester where lack of information exists. Operating behind a veil of secrecy means others get to own the narrative.
Where do we start to find solutions? Accountability is a good start. Private equity today, much evolved from 15-20 years ago, is still answering questions for the actions of their predecessors. And that’s OK. We can acknowledge the missteps of the past, and use it as an opportunity to discuss how the industry has moved forward.
One example of this is the level of which private equity firms have embraced expanding their operating capabilities. The vulture investing strategy of finding distressed companies and selling off their assets for profit has been replaced by utilising sophisticated operational playbooks, experienced operating partners (a recent EY report estimates private equity employs 30% more operating partners than it did just five years ago) and applying logistical collaboration between portfolio companies on areas such as procurement.
All of this means that private equity firms are better positioned than at any point in their history to respond to economic challenges and seize on opportunities for growth that exist, whether that means strategic add-on acquisitions or capital injections into assets that need optimising, for example.
These benefits should be hammered home, and not just by the partners at private equity firms, but also by their management team partners. This can help shift the narrative of private equity firms benefiting at others’ expense from economic crises, such as this current pandemic. The real stories of how companies have grown from private equity investment should be supplemented by the conducting and promoting of industry impact reports – such as the widely cited paper by professors at Stanford Graduate School of Business and Kellogg School of Management that investigated whether private equity contributed to economic fragility. Its findings were quite the opposite – that PE-backed companies actually increased capex investment relative to their peers.
I’d also like to see private equity firms expand their typical media outreach from the financial sector to include more local and industry-specific outreach. I worked with a private equity firm in the United States that had a strategic focus on the natural and organic foods sector, and we emphasised an outreach programme targeting local media in major markets on the U.S. West Coast (where they indexed high for consuming those products), and speaking at industry conferences looking at that sector.
This doesn’t mean ignoring the Bloombergs, the Financial Times, the CNBCs of the world – they are very important to the industry – but much of the negative perception of private equity is shaped outside of the bubble that is the financial sector. What’s more, those are the publications your management team partners and their employees and customers are reading or the events they are attending.
Lastly, don’t shy away from sharing your successes. How have you left your portfolio companies in better shape than when you acquired them? Jobs created, new markets entered, new products/services offered are all terrific metrics to showcase. But also, how has your partnership fostered innovation? These case studies can be shared on your website and via social media. These channels are often the first ports of call for journalists and the public alike, so they should shine a light on the positive outcomes you’ve generated for your portfolio companies.
The root-and-branch analysis of the pandemic and the emergence from it is creating hundreds of story narratives. There will be successes and failures uncovered, and media and politicians will be discussing the so-called heroes and villains. Private equity is often thrust into the latter category, but it doesn’t have to be.
There exists an opportunity for those who have the wherewithal and foresight to embrace it to highlight the positives that private equity bring to industry and economic recovery. Just as previous crises – be it recessions, or wartime, or natural disasters – have created new avenues for innovation, this pandemic has shown gaps in the market that will be filled with pioneers of industry in areas such as healthcare, technology, hospitality, travel and more. Private equity will be a catalyst. It’s high time those stories are told.
Then, maybe finally, we can throw that broken record away for good.