Private Equity’s Reputational Crossroads

Private equity is at its zenith. The industry owns vast swathes of the economy, backing over 12,000 UK businesses employing more than two million people. It’s ridden the boom times to become far more public than its name might suggest.

But, it’s not just its place in the public eye that is unprecedented: the industry faces new macro-economic challenges in a period of higher interest rates and market volatility. It’s a concerning mix: a sector of scale, fresh operational hurdles and increased scrutiny from regulators, investors and society.

Private equity has never had to worry about its reputation to the same level as public companies. It worked. But now, as firms are forced to explore new ways to make money and indeed return money to investors, who is left to do the talking? For an industry so devoted to value, returns on reputation have been overlooked – this needs to change.

The Value of Soft Capital

Last year, Nepean set out to understand how private equity approaches reputation. Interviewing leaders across the industry, we uncovered the role it plays in our report ‘Soft Capital: The Value of Reputation in Private Equity’. It revealed an industry lagging behind.

Just 12 per cent of interviewees claimed they were measuring their reputation, despite 82 per cent viewing it as ‘a business enabler’. It points towards a sector that lacks any real understanding of its stakeholders’ perceptions, even in the knowledge that such information leads to competitive advantage.

At a time of increased scrutiny, private equity has revealed it knows little about the views behind this gaze. To manage stakeholders effectively, and to navigate an increasingly complex political and economic environment, aren’t such insights a necessity?

Private Party, Open Invite

Since 2001, private equity funds in the UK have outperformed the public markets every year – generating 41 per cent more than equivalent investments in Europe – and have delivered huge returns to investors and executives.

Now, it would be reassuring to believe that these returns are simply the result of superhuman business nous, yet even those responsible don’t claim as much. Speaking during Apollo’s latest earnings call, Marc Rowan put much of the success down to macro forces driving activity away from public markets, rather than just “management acumen”.

Private and retail investors are now looking for their share, and funds appear eager to welcome this new source of capital. ELTIFs and LTAFs have emerged to drive much-needed investment in long-term assets, whilst fintech platforms are finding further ways to make investments in private assets more accessible.

Against this backdrop, it’s little wonder that onlookers and even beneficiaries are beginning to ask questions. CalSTRS’ Christoper Ailman recently called on private equity to “share the wealth” with portfolio companies’ employees and the communities in which they invest.

Party Poopers

Concerns from inside the tent are more than matched by those outside. Private equity has long struggled with public perceptions of extraction and exploitation and now, particularly with the arrival of less-sophisticated investors, regulators are also beginning to cast a questioning eye.

Following closely on the SEC’s heels, the FCA last September launched an investigation into private market valuations and the ‘discipline and governance’ of asset managers. The 2007 ‘Walker Guidelines’ – implemented to introduce new disclosure levels at a time of increased scrutiny – are also set for their first major overhaul in a decade.

With Labour considering changes to carried interest and increasingly set for power, private equity risks becoming a battleground. Its penchant for infrastructure and consumer brands regularly rockets it into the headlines, meaning attention from all corners has steadily been on the rise. It’s not unreasonable to predict that even the most mundane deal might soon be put before the court of public opinion.

It’s not the first time we’ve heard this story. Nineties hedge funds and noughties bankers both saw their meteoric rise slowly met with increased protest – something both chose to ignore, with ignominious results.

Back on the AUX

Private equity might be stood on a precipice. We can’t know for certain when it might fall, but catastrophe threatens to come two ways: “gradually, then suddenly”.

This might not feel entirely fair. According to a report this year, private equity portfolio companies experienced annual growth of seven per cent post-acquisition, outperforming public companies. Plenty of businesses have benefited from private equity yet their stories go largely untold.

The industry cannot ignore this rising tide of protests, nor can individual businesses continue to hide behind industry bodies. Trust is built directly and trust is built on action. There is a need for private equity to mature its approach to reputation management. Reputation is a tool to be leveraged and a driver of value, it’s a route to differentiation in a market in which businesses are viewed as uniform.

Through this perception of uniformity, private equity is allowing others to write its narrative. The tales that generate the most coverage are the ones that society tends to remember – see: the Body Shop, Debenhams – and these stories risk holding the industry back. Firms need to turn the tide, engage stakeholders and emerge from the shadows, before misperceptions become facts.