Increasingly people talk about private equity brands, but ask them to define what they mean by a private equity brand and the answers range from the vague to distinct, and there is rarely a convergence of opinions. Part of the talk about private equity brands tends to centre on fund raising activity, which is beginning to have new life breathed into it after two years of stagnation. Specifically, which brands will do well and which will struggle and why. But also there is a definite feeling in some quarters that with the UK and parts of the continental European private equity industry maturing, and as they do so addressing the issue of succession, that long term brand building is something that needs attention. Lisa Bushrod reports
“Investors, do they really care about brands?” asks Wol Kolade, managing director of ISIS Equity Partners. “My argument would be, no it’s about the people who are there beneath that brand. You look through to the people involved.” For Hanneke Smits, partner at Adams Street Partners in London, the brand issue is a subtle one. “There is still a very fine line between the brand institution and the people. Sometimes you have seen team members at firms that you thought were significant and then the GP hides behind brand saying that one or two leaving is not going to deteriorate value of the brand because [the firm] has become very institutional,” she says.
Of course while this may be true the recent case of Harald Mix leaving Industri Kapital and launching a blow out fund raising for his new venture Altor Partners, while Industri Kapital has spent many frustrating months fund raising and is still well behind target, has caused a few smirks. Although, to be fair, Mix’s departure is likely to be one, rather than the whole part, of Industri Kapital’s issues.
Kolade points out that brand is something that needs to be measured over time: “A firm is only a brand when it outlives those people associated with it.” This doesn’t have to imply considerable size and institutionalization, although in some cases it can be exactly that. Few in the industry would have trouble describing 3i as a brand.
Although 3i has some notable deal doers, if any of those individuals do leave, the structure and process of the firm is such that it continues to operate its business as usual. This is supported by the very fact that, in the UK at least, 3i’s brand means it is known and its business broadly understood by a whole range of business people, who, if you asked them, probably couldn’t name a single other private equity firm.
3i’s brand power has meant that on the few occasions that groups of individuals have opted to leave the 3i fold and try life as independent private equity firms their reception in the market is mixed. Commentators are already speculating whether Tom Sweet-Escott, Richard Campin, Chris Graham and Hugh Richards, the team of four who left 3i late last year to form a mid market private equity firm called Exponent Private Equity will encounter difficulties in the fund raising market. This certainly happened to Princess Private Equity, the team that left 3i’s France office two years ago to set up as an independent, although with the last minute help of a placement agent it was able to pull in funds in excess of the original target.
The reason for the mixed reaction is related to the 3i brand pull, rather than being a comment about the abilities of the individuals involved. Institutional investors are concerned that without the brand pull of 3i the new team they are being asked to back may not access the quality of deal flow they have been used to and, especially in the buyout space, the ability to tap into intermediary networks and access the best deals ultimately amounts to being best placed to maximize your investors’ returns. In turn happy investors mean an ongoing and viable business as those investors are likely to commit to future fund raisings.
The idea of a brand in traditional terms means one message that speaks to multiple audiences. However, for many in the industry this interpretation of private equity businesses doesn’t sit well. This is because there is a feeling that there are two distinct audiences that have different needs. The first being the institutional investors that back the fund and the second being the companies that private equity firms back and the intermediaries that may make the introductions to these investee companies.
At first this seems obvious but in fact the investor, the investee companies and the intermediaries are in this to make money and if a large part of what a private equity brand transmits is the message that it will make money then a private equity firm can project a consistent brand to all of its audiences, albeit with slightly different emphasis.
“Successful firms in venture, like Sequoia, Kleiner Perkins, Matrix and NEA, all those groups have been associated with very successful start-ups over last 25 years. They have a lot of credibility with entrepreneurs as well as Wall Street. So we think that in venture the establishment of brands is there. You have to think about how you get to a brand; typically a couple success stories aids brand and then you get into a virtuous circle,” says Smits.
This sort of brand building is extremely long haul stuff, however, and far outlives the individuals originally associated with the firm in question. That is certainly the case with the firms mentioned. Consequently, in the near and medium term it’s easy to see why many firms continue to differentiate between the different audiences to which they must transmit their brand message. Typically a private equity firm will concentrate on good investor performance and good investor relations when dealing with its institutional investors, but will shift the emphasis to the way it responds and interacts with intermediaries and investee companies ensuring this is both professional and consistent.
Even mentioning brand implies an assumption that it is an appropriate word to use. Adrian Johnson, chief executive of Legal & General Ventures says: “What you are looking to create with a PE firm is recognition that this is a good organization to deal with, both for investors and for deal generation purposes and the key to that is really how your team is perceived. I don’t think that is going all the way to talking about a brand. To me brand is appropriate for much more volume type products.” Plenty agree. Simon Turner, managing partner of Inflexion plc, says: “Branding is a much neglected area. There has been enormous investment in brand building in other areas of financial services.”
So, how to create a brand? Turner is clear on this. He says: “You create a culture of excellence, people really enjoy it and it creates energy in itself. It’s quite hard to get people to articulate what their business or their brand really stands for.” David Williams, managing director of Sand Aire Private Equity says: “[Creating brand is about] all the details of everything you do, every touch point your business has with the outside world.”
Both Turner and Williams have created their own private equity firms in recent years, which may go a long way to explaining why they have both thought about and addressed the brand building issue. Turner set up Inflexion in 2000 when it floated on the London Stock Exchange’s Alternative Investment Market and Williams left 3i in 1996 to set up Sand Aire Private Equity. In both cases there was a need to create a professional culture and work ethic that sent a positive message to the private equity market about what these firms were about, essentially good people to do business with who would make money and therefore be here to stay.
Attempting to create a brand will only work in the medium to long term if the issue of succession is addressed as part of this firm and brand building exercise. Without a succession plan, which both retains and motivates the brightest and the best of the younger staff, those staff may decide to go and set up elsewhere and in so doing undermine the value of the brand. This would be unfortunate since one of the upsides of brand is that it should enable a firm to employ the right people, thereby creating that virtuous circle of success.
Firms that have achieved brand status have used this to further their business interests through brand extension and brand enfranchisement. CapMan, 3i and Landmark are just some of the names that are often associated with brand extension. Likewise, many of the successful US firms, such as Benchmark Capital (venture) and Hicks, Muse, Tate & Furst (buyouts) have used their success at home to expand into the European market and attract institutional investor support to do so.
The Carlyle Group tends to be associated with brand enfranchisement since it has operated a system whereby it has branched into new segments of the private equity markets and new geographies on the basis of the Carlyle name. Rather than putting its own people on the ground it pulls together new teams that are allowed to use the Carlyle name in return for sharing the management fee and a portion of the carried interest on any institutional funds raised. The new teams are unlikely to get the same fund raising traction without the Carlyle name and so the arrangement works equally well for both sides. The risk for Carlyle though is that its core brand is undermined if some of these ventures fail to deliver the returns inferred by the Carlyle brand.
If private equity as a brand is a woolly concept, the issue gets further complicated by the belief among many that true private equity brands can only exist in venture, not buyouts. Hanneke Smits says: “In buyouts what’s been hard is that the techniques have become more of a commodity. What’s your value added as a buyout firm? The [buyout] market is harder than on the venture side.”
In some respects the idea that the techniques buyout private equity firms employ are a commodity that can be acquired is good news since this suggests the ability to create a sustainable and stable business if careful plans are laid, a business that should only be enhanced by a genuine understanding of and effort at brand building. “People are going to work more and more on it, reinforcing what’s distinctive about their business,” says Williams.
Whereas the implication for venture is that although the same attention to detail is required in the way a brand is created, unless individuals with the right mix of operational experience, financial know-how and endless contacts slot into place, the business could be destabilized, unless its reputation is of the magnitude of Sequoia, Kleiner Perkins and so forth.
Some believe the talk of brand is actually about monetizing an interest, since brands after all have value. But this is a thorny issue in itself if you question who a brand belongs to? The founders, the next generation of managers and the future managers can all stake a claim.
A trademark or distinctive name identifying a product or a manufacturer
A product line so identified: a popular brand of soap
A distinctive category; a particular kind: a brand of comedy that I do not care for