How the private equity industry learned to communicate – the hard way



Cast your mind back ten years. It is early summer 2007.

Prime Minister Tony Blair is handing over the ill-fated reins of power to Gordon Brown, Lehman Brothers isn’t yet, but would soon become a household name for all the wrong reasons. Northern Rock, bail outs and the most damaging financial crash since 1929, are just around the corner.

But for now everything seems relatively calm. There’s one exception though.

In June 2007 the UK private equity world found itself at the centre of a storm. It had started two years previously in Germany, where the so-called locust debate was front page news. When the storm hit the UK, the criticism was almost identical, exposing a gaping hole in the way private equity firms communicated.

Until this point, hedge funds were the supposed baddies. But in 2007 private equity firms joined the club. They too became poster boys for excess and greed.

Private equity firms had performed spectacularly well in the preceding years. But this success wasn’t being earned in private, in silence. Many leading private equity firms and their often larger than life leaders, found themselves as front page news: they were often characterised as a bunch of rapacious, highly secretive, leverage-loving, insensitive individuals who were pocketing millions of pounds through opaque takeovers and acquisitions of household names. In short – seemingly doing very little while earning a fortune at the expense of regular people who were doing all the hard work. And to top it all off: they often paid little or no tax. You may remember that one PE boss apparently boasted that he paid “less tax than a cleaning lady”.

The reality, of course, was somewhat less clear-cut. But most private equity firms chose not to respond in public. They kept their counsel. Across the industry, there was a wall of silence. Many of them thought that the storm would simply blow over and weren’t used to having to front up in public.

There was a group though who weren’t keeping schtum. Pitted against the silent private equity firms were an alliance of highly vocal unions, politicians and other interested groups who ran an effective political campaign. They hated what the firms stood for – and were prepared to let the world know it.

When I covered this story as a journalist at the time, I remember talking to an in-house spokesperson for one leading private equity firm – it was unusual for one to have a communications person in 2007. I remember them asking me why I so ‘slavishly trotted out the union’s lines?’ My response was simple: “they talk, you don’t and I need copy. Work it out”.

Those critics of the private equity world in the UK, who had perhaps learned from successful campaigns in Germany, mounted a highly effective campaign, using emotive language, stunts, while they were always at the end of the line, telling you what they thought.

Let me give you some examples. One union official at the time said he was ready to meet a certain private equity CEO and have a fight to settle their scores in Hyde Park. I couldn’t have made up a quote better myself. Meanwhile, the critic also used the fight metaphor to portray PE as a zero-sum game: if private equity wins, then the man or woman on the street loses. That cut through to my readers.

And can you remember this one? When the trade unions, protesting about job cuts at the private equity-owned AA, paraded a camel outside the church of the private equity firm’s CEO – a reminder of the biblical parable that it is easier for a camel to pass through the eye of a needle than it is for a rich man to enter heaven? Crude, but very effective.

In contrast, the response from the private equity firm under attack was typically: ‘no comment.’

And the nadir for the private equity industry came in June 2007 when four of the supposedly worst transgressors, the so-called Masters of the Universe, were dragged out of their silent bunkers and into the public glare. They were brought into to appear in front of the House of Commons Treasury Select Committee for a public grilling. A modern day flogging in front of the UK’s media.

As a financial journalist at the time, I knew this committee hearing was going to be a big deal when some of my political reporter colleague tried to elbow their way in front of me to get to the head of the queue to get in. Until that point, I doubt any of them understood much of what private equity was about.

The public grilling came and went. The private equity industry faced up to plenty of tough headlines in the short-term. But with financial markets nose diving months later the spotlight moved onto a much bigger story, the financial crisis of 2007/8. Their individual discomfort melted away into the wider chaos.

Since that time, the private equity industry has learned a lot. It has revolutionised the way it communicates with the public and other interest groups. It didn’t happen overnight, but the events of 2007 served as a very difficult but timely wake up call for an industry that simply refused, or didn’t see the value, of engaging with people beyond their investors.

Private equity firms, in the main, now realise that silence is not always golden. Faced with a vacuum of information, critics jump to their own, often incorrect, conclusions. Most PE firms are now prepared to engage with interested parties and critics, shaping and influencing opinions, rather than simply hoping things will blow over, as they did a decade ago.

Today, most PE firms have realised you need communications to be a standalone function within an organisation. The idea that a managing partner can somehow ‘do some PR’ on the side is simply not credible. Such an approach doesn’t work and most firms now have in-house capabilities that are comprehensively supported by agencies, whose collective job it is to protect the reputation of the firm and use communications to help the business grow.

Most PE firms recognise there is now a clear link between reputation and their ability to fundraise. Ensuring reputation is strong when fundraising is an activity we at CNC spend a large amount of time on with our PE and venture clients.

A firm might turn in stellar performance but that’s not enough in today’s world. Being transparent and making sure external stakeholders understand who your backers are, how you invest, how you do business and how you secure performance is essential. Failure to engage in this way can have a detrimental effect on the raising of new capital. An embedded communications strategy is not just a cost, it is a source of clear differentiation and competitive advantage.

A commitment to transparency, openness and communications is now also expected by many investors, with an increasing number insisting upon such attributes in requests for proposals. The rules of the game have changed a lot since 2007.

Of course, as with all industries, not everything is rosy in the garden with some firms refusing to adapt. However, the more open approach to communications that the PE industry has taken since 2007 has helped the asset class fully embed itself as a critical piece of the ownership jigsaw.

No longer the anti-hero of 2007, the PE case study a salutary lesson in how engagement, rather than silence, is, in the vast majority of cases, a much more effective way to respond to criticism.

Simon Evans

Simon Evans

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