Reputation and brand management take on greater meaning during tough market cycles

Volatility in financial markets, concerns about higher interest rates, geopolitical instability and the threat of a global recession is forcing private equity fund managers to dramatically alter how they oversee portfolio companies, monetize their investments, and raise capital for new fund vehicles.

Brand management, understandably, may not be the first consideration for a fund manager grappling with uncertain economic growth and brittle financial markets, but burnishing a fund’s reputation should not be overlooked or neglected. In fact, successful reputation and brand management is vitally important to help ensure success in fund raising and in attracting owners of private businesses that could be ideal portfolio company investments. Effective reputation management can enable GPs to more readily turn to investors for capital when a new fund is being raised and it will help GPs attract private businesses when they are putting capital to work.

Reputation management in today’s difficult markets likely will take many forms. It can involve taking time out to catch up with investors and other market players at industry events - like SuperReturn International - to cement existing relationships and build your portfolio of new industry contacts.

Likewise, reputation management can involve offering even greater transparency for limited partners who are on edge, monitoring the impact of financial market volatility on their returns. Investors such as pension funds may want more regular updates on how portfolio companies are performing, what’s being done to bolster growth for these businesses and, increasingly, how managers are fulfilling ESG requirements or executing on their ESG plans. Making this information readily available and flagging any potential issues for LPs when everything is not going according to plan is all part of a larger brand management effort. Let’s face it, the last thing a manager wants is for their investors to first learn about any negative performance issues from The Wall Street Journal, Bloomberg or The Financial Times. Nobody wants to be a punch line for jokes on CNBC!

At the same time, reputation and brand management involves building a close partnership with portfolio company business owners who want guidance on how to weather uncertain economic conditions. Developing a reputation for building close partnerships with their portfolio company business leaders can help GPs attract new investment opportunities in other private businesses.

Managing brand and reputation today is tricky because private equity fund managers face an array of challenges tied to a runup in interest rates that has not been seen in decades as central banks look to aggressively stamp out inflation.

There is less capital available and it is more pricey so exits through mergers and acquisitions are less likely, and equity markets are not readily enabling the monetisation of investments through initial public offerings (IPOs) or special purpose acquisition companies (SPACs).

Last year, M&A deal volumes sank 17% from the previous year, and the value of these transactions dropped 37%. Meanwhile, IPO issuance fell 45% from 2021. In the first nine months of 2022, global private equity fund raising also fell 41.8% from the previous year.

Conditions in financial markets were not much better in the first quarter of 2023 as concerns about the stability of financial institutions weighed on debt and equity markets. These anxieties likely shaped investor responses to the SuperReturn-BackBay Private Equity Brand Survey conducted early in the second quarter with general partners, limited partners, fund-of-funds, consultants and other private markets professionals.

The majority – 86% – of those surveyed said that the need for a strong brand has intensified in the last two years, and four in five described proactive PR and brand management as ‘very important’. Against this backdrop, it’s unsurprising that over half, 60%, of private equity firms surveyed have examined their brand positioning in the last 12 months.

Two-thirds of those surveyed plan to invest more in their marketing and branding over the next one to two years, with thought leadership, conference speaking and media relations featuring prominently as key areas of focus. While the wider economic outlook may be uncertain, it’s encouraging to see many private equity firms taking an active approach to managing what’s within their control.

Modern private equity has weathered many credit storms and market cycles. While no single market crisis matches the last, much the way history never repeats itself, the innovative spirit at the heart of the private markets means companies are well-placed to overcome the challenges facing them. Financial sponsors will continue to introduce new ideas by putting capital to work and fostering growth in a wide range of industries.

What industry participants should always keep in mind is that they ought to be the ones telling their story and not having someone else tell it for them. Strong brand reputations are hard won, and should not be squandered. Private equity firms can control the narrative in the marketplace and the key to this is proactive brand and reputation management.

With thanks to  BackBay Communications for their contribution to this article.