Dealing with differentiation, transparency and succession planning
With increasing competition for capital – thanks, in part, to regulatory changes regarding marketing, as well as growing limited partner influence – many private equity firms will need to be innovative just to keep pace with peers. Their inspiration can be found in the public markets, where issuers have been dealing with a number of the same challenges for years, particularly in three of the biggest issues facing private equity today: differentiation, transparency and succession planning.
Differentiation
According to a 2014 McKinsey & Company report, ‘Private equity: Changing perceptions and new realities’, the path to differentiation starts with these three steps:
1. Ask yourself tough(er) questions
a) Why is now the right time to invest with your firm or this fund?
b) What makes your fund more attractive than those offered by peers?
c) What don’t current or potential investors fully understand/appreciate about your firm, your fund or the market opportunity?
d) How does your firm evolve its capabilities to stay ahead of the competition?
2. Think like a brand strategist
a) What is the firm’s ‘investment brand’?
b) What makes its investment brand authentic?
c) Does every touchpoint with investors genuinely reinforce the investment brand?
d) How does it build and preserve trust?
3. Act like a marketer
a) How can you simplify your value proposition and/or deflate potential value inhibitors?
b) How can limited partners stay current on their investment?
c) What’s the communications channel strategy?
d) How do we foster a candid and ongoing dialogue with investors between fund-raising campaigns?
Transparency
The compliance checklist for private equity firms continues to grow in the wake of rapidly evolving regulatory requirements. From the formation of the SEC’s Asset Management Unit in 2010 – designed to analyze private equity issues and practices – to the creation of the SEC’s Office of Compliance Inspections and Examinations in 2012 to the most recent changes within Dodd-Frank, private equity firms face greater reporting scrutiny than ever before.
At the same time, private equity is facing increasing demands from limited partners, who are looking for more timely and insightful information on both the current performance of their investment and future expectations. Common topics of greatest interest to investors that are applicable for limited partner discussions include:
• Review of strategy
• Sector dynamics and projected growth rates
• Portfolio operational management execution
• Progress on achieving key goals
• Corrective actions needed/taken
• Forward-looking financial guidance
• Forward-looking operational guidance
• Financial results
• Segment performance
• Products and services
• CSR/sustainability initiatives
Succession planning
Few segments of the financial industry are more personality-driven than private equity. When a private equity firm is launched, it’s largely done so on the founder’s reputation. Subsequently, he/she is the personification of the firm, the embodiment of the investment strategy and the owner of the vast majority of longest-tenured limited partner relationships.
Most private equity firm leadership succession plans rely on internal candidates. This creates various communications issues. For example, while the newly named CEO is known among stakeholders, he/she is also likely to be a first-time CEO. As a result, he/she will face skeptics internally and externally, as well as existing perceptions that may need to be dislodged. Therefore, it will be critical to establish his/her:
• Experience in context of the firm’s growth strategy
• Leadership philosophy
• Unrelenting commitment to strong ethics and integrity
• Authentic and differentiated leadership ‘voice’ and communications style – especially given the founder’s typically strong presence and engaging persona.
Other areas of emphasis during a leadership transition include:
• Creating realistic and measurable near and long-term expectations
• Building credibility for the reconfigured leadership team
• Redefining the working relationships with limited partners, directors of the portfolio companies, colleagues and business associates
Without question, those firms that are able to maintain a consistently narrow performance-to-expectations gap will have a competitive advantage in the marketplace. In order to create this advantage, private equity firms should look at the IR playbook of forward-thinking public companies to better understand how to successfully balance their SEC compliance imperative with their investor communications obligation. Doing so not only helps in fund-raising efforts, but also in demonstrating the value derived from the management fees.
Rob Berick is a senior vice president and managing director at Falls Communications. This article is based on a report, which can be accessed here.
