Private equity as an asset class has long held a reputation for staying in the shadows. The industry is changing as it grows in prominence and courts new sources of investment. How industry players communicate is becoming as important as how they operate.
The industry until today
Private markets have ballooned over the past two decades, as sustained low interest rates combined with greater investment from a range of sources has led to enormous amounts of investment in the industry. For years, highly attractive returns and increasingly high-profile acquisitions have meant that attention is increasingly focused on these firms as they permeate everyday life, from high street brands to airports, crematoria, and breakfast cereals. This boom has focussed attention on the industry, even as it has been shrouded in opacity.
How the stakeholders have multiplied
Assets under management in the PE industry totalled c. US$2.7 trillion according to Preqin data in 2010 globally. This expanded to US$9.8 trillion globally by 2021, of which 30% is in Asia today. The number of stakeholders has also increased massively, and they are more interested than ever in how these firms operate. Pension schemes are among the largest investors in alternative asset classes, and count millions of pension holders as their beneficiaries. These pension holders increasingly want to know how their money is being invested, in good times and bad.
At the same time, the larger buyout firms own controlling stakes in companies which employ hundreds of thousands of individuals, many of whom want to better understand how the PE model works and what it means for them as employees. Firms don’t just need to communicate why their investments are thematic, topical, and exciting, but also how they are straddling political risk, as well as their social and environmental implications.
As in any industry, the best firms thrive on their reputation. If a firm doesn’t have good communications with the outside world, how can it convince – and attract – the best talent. On the flip side of the same coin, private equity firms need to convince co-investors and investee companies that they are a partner of choice. Firms with a professional and strategic approach to communications succeed because they can clearly demonstrate the benefits they offer as investors or owners. Success depends on trust from multiple stakeholders, which is earned over time, and based on openness.
The next frontier: Retail investors
The latest frontier in private markets is the retail revolution, and major PE firms as well as a host of new platforms are arguing more and more for “democratisation” of the industry. The influx of retail money - is a matter of when, not if according to PE leaders. This is because ways to invest are proliferating, ranging from tokenisation to listed investment trusts. In effect, the barriers to entry for retail investors are being removed. Against this backdrop, communications have never been so important. Firms will have to become far more visible and transparent, as well as offer education as they court this new investor class. The benefits for the industry are clear: according to McKinsey, average retail investors currently allocate two per cent of their portfolio to alternatives, while the firm predicts that this proportion could rise to five per cent in the next three years, bringing between $500bn and $1.3tn in new capital to alternatives globally.
The how and the why
Private equity firms need to recognise that visibility, accountability and showcasing their own abilities are critical for the future of the industry – clear messaging around not only what the company does, but also why. Having a well-structured, strategic communications plan that seeks to make an emotional connection with audiences is the best way to achieve this. This means:
- Building close relationships with the media through regular background meetings so they understand your culture, investment strategy, purpose and vision.
- Developing educational and accessible materials about your strategy and the industry for investors and other stakeholders (such as pension holders or employees of portfolio companies).
- Underscoring your strategic vision with regular thought leadership, while focussing on values and purpose through partnership profiles and in-depth case studies of what you have achieved with portfolio companies.
- Preparing for downturns well in advance through scenario planning and horizon scanning.
- Increasing executive visibility with profiles on your website as well as in the media.
- Ensuring your firms’ sustainability and community engagement credentials are clearly available.
Economists are forecasting a downturn which could last several months or potentially years. This will impact the ability of private markets firms to raise money, as well as the performance of their portfolio companies and funds. Because of the sector’s increasingly prominent role in business and everyday life, every misstep or failure is going to be under the spotlight. If and when investments run into trouble, firms which have spent time cultivating an approach of openness and engagement are more likely to be given the benefit of the doubt and avoid unfair criticism based on a lack of understanding.
Fergus Herries is an associate partner at SEC Newgate Greater China. Viewpoints is an article series contributed by members of PRHK, Hong Kong's PR and communications association