- January 10, 2018
By Oliver Mann and Matthew Thomlinson
Investor interest in private equity funds continues to break records. The low interest rate environment and sheer amount of money in the market has not only fuelled the number of deals at historic high valuations, but has left many funds with significant amounts of cash burning a hole in their pockets.
As the investment landscape rushes to meet demand, it is proving increasingly difficult for communications to keep up. So what can we expect from the year to come, and how can private equity communications teams ensure that they stay ahead of the game when it comes to telling a coherent and consistent story?
With prices looking set to rise and a limited number of attractive assets in the market, 2018 will likely see funds continuing to step out of their comfort zones in the hunt for returns.
The competition, especially from corporates, is stiff. Strong stock markets combined with existing cash piles mean that corporates now have the financial firepower and supporting synergies to beat the competition from the private equity world. With mid-sized companies proving prohibitively expensive, and mega leveraged buyouts still viewed with some caution, private equity investors will need to think harder than ever about how and where to invest.
There is one particular trend from 2017 that may well gain traction in 2018. Last year, investors increasingly looked to the pre-crisis days and what worked last time the market was flushed with cash: to club deals. Written off as too risky after the financial crisis, consortiums of investors looking at big assets were previously thought to be a thing of the past.
But 2017 saw the club deal return with a bang. One of the stories of the summer was the battle for German drug maker STADA. Bain Capital and Cinven eventually prevailed in a transaction worth €5.24 billion, while fending off bids from a rival consortium comprising Advent International and Permira.
And beyond funds working together, there are rumours that this is turning into something altogether more unconventional – traditional private equity players cosying up to corporates.
In December, German chemicals giant Lanxess was rumoured to be teaming up with Apollo Global Management to bid for AkzoNobel’s specialty chemicals business.
Unlikely bedfellows you could argue. But on paper the rationale for these partners to club together has all the ingredients of a perfect marriage. Corporates can provide in-depth sector knowledge and useful synergies, while private equity partners can bring the financial backing, access to new markets and broader expertise required to drive the target’s growth.
The end result is that consortiums can target larger companies while sharing the cost, use their expertise to drive efficiencies, carve out assets where appropriate and give themselves a good chance of gaining the returns their investors demand. The asset should also benefit from this complementary fit, and sellers will likely see the positive side.
So how does this affect communications?
Communicating club deals can be a complex exercise. With several communications teams each using their own mentality and approach, the challenge for any one participant is to focus on a specific area of expertise that makes them stand out from the rest of the consortium, without impacting the overall narrative.
This is a cultural issue more than anything else. Ensuring a consistency in tone across a number of different minded communications teams is a challenge that requires all participants to be open and willing to cooperate.
The potential problem at the heart of this is that many funds still simply do not communicate, and when they do it is exclusively about the deals in which they participate. But in an increasingly competitive market, talking on a deal-to-deal basis can arguably make an investor look opportunistic and tactical, rather than strategically minded.
This has not proven overly troublesome for some of the major players in the past. But when funds are turning to less than conventional investment strategies and are building relationships with partners who could be viewed as not so like-minded, justification and reassurance from both a public relations and investor relations standpoint will become more important than ever.
One way to smoothen this process is to take the initiative while deals are not happening. This means going beyond talking about specific deals to discuss the culture and values of the investor as well as how the market itself is changing and what that means for investment strategies across the sector.
It also means positioning a fund as a preferred partner for a range of stakeholders, from fellow private equity investors to institutional investors and now even interested corporates, emphasising its unique selling point and demonstrating how a range of transactions could create value.
Admittedly this can’t happen overnight. It requires detailed preparation and understanding of how and where each investor in the market wishes to be positioned. It also means that an open dialogue between deal teams and their colleagues in communications is more important than ever to ensure that what is being said does not contradict those transactions that are in the pipeline.
In any case, such a crowded market means that standing out and preparing for trends before they become overheated cannot be underestimated. But if it gives an investor the reputational edge in the eyes of a target’s management or shareholders, the effort will have been worth it.