The democratisation of private assets – are firms ready?

“We’re called private equity for a reason, it’s because we’re private”. This used to be a fairly common sentiment: “private” wasn’t just a description of the asset class, it was a deliberate posture adopted by private equity firms.

This quote was ascribed to a senior figure in private equity by one of the interviewees for a report we recently produced on how alternative asset firms are adapting their communications in an era of increased scrutiny.

While views have changed, we discovered many in the industry are still adjusting as the curtain is peeled back to expose them to the view of a wider audience.

Increased transparency

There are several drivers for increased transparency. Last year’s guidance from the US Department of Labor enabling 401(k) plans to invest in certain private equity funds, and France’s state investment bank, BPI, announcing in October that they were creating a fund giving retail investors access to private equity both mark a new democratisation of this asset class.

Retail investors bring a new set of communications challenges. Not only is the level of sophistication lower than for private equity’s normal investors, the messaging and the medium have to match this new audience. Private equity has, for instance, been much less enthusiastic about embracing social media than other sectors, but it’s a medium that can’t be ignored if you want to communicate well.

The expansion in potential investors, as well as being a more significant and high-profile player in the economy, brings opportunity and risk in equal measure. It draws the attention of regulators and politicians, who are much more likely to intervene to protect consumers as well weigh in when the optics are not good. The Payment Protection Insurance saga in the UK springs to mind. As is the current debate over carried interest.

Growing scrutiny would have been inevitable in normal times with an industry that has expanded as rapidly as private equity. But we are not living in normal times.

The coronavirus pandemic has demonstrated how essential the private sector is in delivering food, essentials, PPE and vaccines, but it has also tested the values that companies profess.

Tesco’s decision to return £585m in business rates relief that it had received, and the incredible offer from AstraZeneca to provide its vaccine to developing countries at cost, in perpetuity, are just two examples of companies displaying real leadership.

These are large public companies, but there are countless stories of businesses (many backed by institutional private capital) providing free meals to frontline workers, free online training courses for job seekers and much more besides.

Their actions are examples of what we, through the work we do, have termed “corporate body language” – the signals that a business sends to its customers, employees, investors and policymakers of what it represents.

Like physical body language, these signals, and the behaviour that creates them, are instinctively picked up on by stakeholders. The question is whether enough firms really think about their corporate body language and the different stakeholder groups reading it.

This is especially true given there is often a large gap between what firms say and what firms do. The walk and the talk don’t match.

As an industry used to flying under the radar, private equity has sometimes behaved as if how it was seen by outsiders wasn’t that important. While many firms do think carefully about communications, our study revealed that many did not try to measure or understand their reputation systematically, instead relying on “gut feel”.

While measuring reputation can be a subtle art, for companies normally so adept at understanding and using data, private equity is potentially missing opportunities to add value.

Despite the inclination to reticence, the alternative investment industry has a positive story to tell. The 4,000 private equity-backed businesses in the UK, many small or midsize, are proof of the need for private capital, and the 950,000 people they employ are a tangible contribution.

Not every investment a firm makes is a success, and criticism is quick in such cases, but the solution isn’t to adopt defensive body language.

Ironically, in the area that is probably most interesting to the public – environmental, social and governance issues (ESG) – private equity is further ahead than many would think.

Public perception

It’s taken for granted that ESG factors are involved in all investment decisions, and there are no shortages of metrics on sustainability and social impact for analysts to pore over. To large sections of the public, and to many politicians, however, the perception remains that all private equity cares about is the money.

The question is, why bother to talk if you think people don’t want to listen?

Opening up does contain risks, but I would argue that silence and the wrong type of corporate body language will be worse in the long run.

Especially in a world of “building back better”. Understanding the expectations of different stakeholders, and the strategies that will make a material impact, takes time and effort. But the prize in terms of more engaged staff, better investor and government relations, and ultimately a more sympathetic ear from a broader group of stakeholders, is considerable. It is this, along with all the operational changes, that can notch up a multiple and value of a business. Perhaps it’s time to loosen up.

Written by Gavin Davis for Private Equity News