News Analysis: Private equity in public offensive

In reaction to mounting criticism over their methods, private equity companies are striving to show that they are good for business. David Quainton reports.

One in five Britons employed in the private sector works for a company backed by a private equity firm; the UK private equity sector, which raised £27.3bn last year, accounts for 51 per cent of the European market (source: British Venture Capital Association).

And yet the firms behind some of Britain's biggest household names remain largely invisible to the public. This may be one reason why PE firms are seen as guilty of a ruthless pursuit of efficiency, and why union leaders frequently express dismay when private equity firms take over.

Last week the Transport and General Workers Union expressed concern for the future of United Biscuits staff after the company completed a £1.6bn private equity deal.

Elsewhere, a campaign by general union GMB inspired an Early Day Motion this summer after it accused Permira of ‘asset stripping' the AA.

Private equity firms counter that they improve the profitability of companies via genuine industry experience. They often step in to acquire underperforming businesses, in anticipation of turning them round.

But their increasing influence has brought mounting scrutiny, forcing the industry to react.

‘Dialogue is needed'
Permira, which is Europe's largest private equity group, last month called in Bell Pottinger Public Affairs in the wake of the AA affair, and is close to recruiting its first global comms chief.

Moreover, the BVCA, which has lobbied on behalf of the industry for 24 years, is beefing up its PR by creating a ‘communications panel' of experts mined from its membership.

‘Private equity firms now realise dialogue is needed,' explains BVCA head of comms and public affairs Mark Fox. ‘The message that private equity firms benefit UK business is increasingly seeping into press coverage.'

The firms behind this year's major acquisitions have included Apax Partners, 3i and Blackstone. Often an
acquisition will bring with it debt, and restructuring will equate to job losses.  ‘Private equity has a delicate balancing act to perform,' says Harry Chathli, director at financial agency Corfin Communications.

‘On the one hand it must tell investors the rate of return is good. On the other it has to tell media that it is not just in it for the money.'

But, surely, money is the prime motivation, as eventually every business is sold. So the message private equity teams have to get across is that the work they do benefits organisations and that the alternative is a loss-making business. By hauling in industry experts and making operations more efficient (often by cutting staff) the private equity investment often turns small, family-run businesses - or orphans within groups - into successes.

‘Private equity firms can make changes out of the glare of the public eye,' says Chathli. ‘They can bring on board experienced business partners that turn the business around. This creates jobs and puts money back into British industry.'

‘Private equity firms are big employers now,' says The Sunday Telegraph business editor Dan Roberts. ‘They used to want to be left alone, but that created a culture of distrust.' Roberts says the firms are now more readily engaging with media and running CSR programmes. ‘They are becoming much bigger charitable donors,' he says, pointing out how eight firms, including KKR and Texas Pacific, recently formed a charitable foundation.

This kind of co-operation is a tacit acknowledgment that the ‘good side' of private equity needs to be communicated to overcome negativity.

‘Legitimate public interest'
This year the BVCA has produced two reports highlighting the positive impact of private equity on imports and exports, and the general improvement to stock performance. They are part of the body's efforts to allay public fear. ‘I do not think you will find a serious business commentator who shares the old fears about private equity involvement,' insists Fox.

‘But there is a legitimate public interest that has to be addressed. We try to describe our members as "health farms" - they are not an end in themselves and may cause some pain, but the result is a better business.'

Financial Dynamics MD Ed Bridges, who represents Cinven, says private equity firms still have some ground to make up in the public arena. Work is still to be done. ‘Every group has its own way of dealing with media,' he says.

‘There's a need for transparency throughout the investment. We have to show the public what challenges the company has overcome and where the business is now.'

Bridges cites the work that Cinven did with United Biscuits, which it managed to keep profitable despite healthy eating shooting up the political and media agendas. ‘By getting out this message we can change the impression of a rapacious barbarian at the gates, interested only in asset stripping,' says Bridges.

Ultimately, private equity's biggest strength is its greatest comms weakness. It can improve companies because changes are made privately, without the scrutiny of a public company. This, though, can create suspicion. ‘It is much easier to say "private equity firms slash jobs and gobble all the cash",' says Financial Times associate editor Paul Murphy.

‘It is much more difficult to say "private equity firms are the financiers riding a transformational wave, where the demands of big institutions for absolute investment performance is fundamentally altering the pattern of corporate efficiency.'

That is precisely the message that the private equity industry is now striving to get across.

PRIVATE EQUITY FROM 1945 - PRESENT:

3i Formed in 1945. Invested over £17bn. Media relations director Ingrid Tighe heads comms team of five.

Warburg Pincus Formed in 1971. Has £7bn under management. Invested in Avaya. Uses Citigate Dewe Rogerson in Europe.

Apax Partners Formed in 1972. Advises over £20bn worth of funds. Invested in Tommy Hilfiger. Currently searching for global comms chief.

Kohlberg Kravis Roberts and Co Formed in 1976. Involved in over £120bn of transactions. Invested in VNU. Uses range of advisers including Gavin Anderson in Asia.

Cinven Formed in 1977. Involved in transactions worth over £40bn. Investments include Gala Group. Uses Financial Dynamics.

Blackstone Group Formed in 1985. Investments include United Biscuits. SV-P of corporate comms and PR John Ford heads global comms team.

Permira Formed in 1985. Total funds worth over £7bn. Invested in Birds Eye. Uses Bell Pottinger Public Affairs.

Carlyle Group Formed in 1987. Has at least £23bn of capital under management. Investments include Qinetiq. Director of global comms is Christopher Ullman.

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