Over the course of 2018, speculation suggesting that Private Equity (PE) faces an imminent crisis has intensified. A surplus of investor cash chasing returns, persistently low-interest rates and a shortage of investible assets have combined to fuel concerns of a slowdown in the market. While much of this may be overplayed, there is an undeniable shift in how, where and when private equity firms deploy their capital.
The traditional PE mix of standard buyouts, coupled with infrastructure and real estate deal-making expertise is increasingly becoming a thing of the past. PE houses are diversifying in the pursuit of returns, following a more complex mix of strategies from minority investments to consortium deals, secondary, venture and credit investments.
While the diversification into new asset classes is ensuring better returns, it has placed extra weight upon internal infrastructure. Communications is one area that is having to respond to this new challenge. As investment strategies have multiplied, communications departments are increasingly struggling to develop global narratives that distill the core principles underpinning the portfolio. Keeping messaging up to date is becoming ever more challenging as the pace of deals across different funds increases. But with fears of a looming PE crisis, can firms afford to leave their communications playing catch up?
The dangers of unbalanced messaging: Look at corporates
Messaging is often based on a firm’s traditional view of itself, making it difficult to reflect its aspirations, especially the areas in which it has recently expanded or is looking to expand into. This can paint a misleading picture for investors, potential investors, portfolio companies, potential targets and a broader range of stakeholders. If communications strategies are based on the investments a firm was making years ago, stakeholders will be in the dark about the future direction of the firm and confused when new strategic allocations take place.
PE firms are now facing the same challenge as one of their favourite targets: conglomerates. These large corporates face the challenge of making their messaging work across a range of business units, segments and markets. A lack of a coherent and tailored narrative often means that public markets have a poorly balanced understanding of what a business stands for, and what it is good at. In some cases, this can also weigh on their share price. As PE firms pursue new strategies where they lack a strong reputation, they can suffer a similar fate.
So why is that a problem for PE?
As PE firms get bigger, their universe of stakeholders increases too. It’s not good enough to engage with established audiences, completely new targets need to be reached. This means the old messaging is often unfit for purpose. Credit investment and infrastructure investments require distinct and nuanced messaging. If investors do not understand a firm’s uniqueness, they are less likely to commit capital to individual funds. And as the market is getting ever more crowded and flushed with capital, having a clear profile is key in attracting the good targets. After all, if target companies can’t work out what value a certain PE owner would bring, then why would they want to be owned by that fund? Not to speak of important issues such as talent attraction and retention too.
Of course, there are some funds that are so well known this won’t be a great issue. It’s often the relatively new funds that are in the process of building a profile with stakeholders where this issue is likely to be more acute. This is tolerable while the market is buoyant, but if market conditions deteriorate, those who don’t adapt the way they communicate will face difficult challenges.
So what can PE do to change? Make the most of your communications team
Communications is crucial and has to be a central considerations in a firm’s set-up. It often acts as a hub for the different arms of the organization. Communications necessarily draws upon expertise from right across a firm, meaning that it operates from a unique position that ensures understanding of where a firm invests and how investment strategies are connected.
Size is irrelevant, the leadership of PE houses need to bring communications to the center of the organization and not just leave it as an afterthought. Communications can act as a mediator, taking input from different teams to mold messaging and make sure what is being said is: a) suitable for target audiences and b) does not contradict what is being said elsewhere or has been said before.
This ensures firms clearly articulate what they stand for, keeping its network of stakeholders informed about its track record and future trajectory. It’s a case of building for the future and making friends when you don’t need them. If the market does turn and fundraising becomes more difficult, those with a concise and relevant message will have a clear edge.