Faces blown up to four-foot-wide posters and paraded around Glastonbury for the cameras and labelled pariahs – probably not what the entrepreneurs of UK private equity (PE) firms had in mind when they considered how best to manage their public profile.
It was the last humiliation in what turned out to be a very bad week for the industry, and a debacle that represents one of the most significant business communication failures of recent years. Private equity has consistently failed to communicate its case effectively, a fact even the executives representing the sector were forced to admit to the Treasury select committee last month.
Their performance was only exceeded in incompetence by the populist probing of select committee members themselves. Not even the British Venture Capital Association (BVCA) managed to put the case for private equity to both the government and the public in a clear and effective way.
Yet the questions put to BVCA chief executive Peter Linthwaite were predictable – the industry could have been armed with a robust position ready to enter into open dialogue with its stakeholders. To crumble at the first fence was not what the industry expected or deserved. It left the PE industry looking arrogant and duplicitous.
The case for tax reform – effectively that PE companies should pay regular corporation tax and not use a loophole devised to encourage start-ups – led the charge. Many in the private equity sector agree this needs addressing although strangely Gordon Brown, the architect of the tax legislation in dispute, has kept rather quiet on the matter.
This is one of the more obvious communications failures. If UK tax legislation allows private equity companies to take advantage of tax legislation meant to reward venture capital, then they should hardly be blamed them for doing so. But this biggie is a fight the industry is almost certain to lose.
But the industry also needs to explain how it fits into the UK and global financial system and how it can actually benefit the public. It has been communicating to the wrong stakeholders. PE groups have a preference for talking to investors and financial services players, matched by a neglect of the staff of potential target firms.
You can guarantee that the employees, customers and other stakeholders affected by private equity have been the last to be consulted or approached.
The argument against initiating an early dialogue with workers in a target company tends to be that details of the deal will be leaked. But the industry now has such a high and negative profile that the idea that PE can effectively and secretly stalk publicly quoted companies is becoming unrealistic.
The secretive approach, now seen as part of the problem, needs to be replaced by a more transparent strategy.
There are clear advantages in improving employee communications in the run-up to a disposal. If people feel valued they tend to give the benefit of the doubt to new shareholders.
If employees willingly throw in their lot with a new private equity owner because they have been honestly and fairly informed of what was going on, then perceptions will change towards private equity.
What might the new template for employee communications look like when tomorrow’s companies go private? The model is best seen in EU territories where employees are strongly represented on supervisory boards, especially in Germany and the Netherlands.
When an investor consortium led by Kohlberg, Kravis Roberts & Co (KKR) and Silver Lake Partners took a controlling stake in Dutch firm NXP Semiconductors in mid-2006, a forceful means of engaging the 37,000-strong workforce with the new realities of private equity ownership was required.
NXP, which was spun out of Royal Philips Electronics with sales of €5bn, chose to begin its employee communication process in late 2005 when the intention to sell was first made known.
Back then, managers were uncertain whether the semiconductor-making division of Philips would be disposed of through a trade sale or an IPO. Private equity wasn’t even considered.
Nevertheless, NXP maintained a dialogue with its works council, and used video debates on the company intranet to keep employees informed. CEO-designate Frans van Houten participated in these with staff leaders.
When it became known that NXP would be sold to a private equity group, Van Houten again kept employees in the loop as much as possible.
Partly thanks to proactive communications, few employees sought to jump ship from NXP or transfer back to parent group Philips. In the end, even the most hardened deal-maker knows that committed employees are any company’s most precious asset.
But even if British PE firms do start to pay more attention to employee communications, there is still a PR job to be done on the whole industry. There are many criticisms that have so far gone undefended. The allegation that private equity operates on a short-term basis for profit, for example, is not the whole picture. Listed companies trading on the FTSE indices are measured daily by their share price and their owners report quarterly and annually. This is a much shorter time-frame in which to show growth than the average five-year plan under which a PE firm works.
The fact is that companies backed by PE have helped the British economy grow and made it more competitive globally. The Financial Times found that the 30 biggest private equity deals arranged in 2003 and 2004 created 36,000 brand new jobs, an increase in employment of over 25 per cent.
At its root, PE does not actually function as a collective industry, but as a disparate collection of individual, and individually minded firms, each with its own agenda.
In the coming months, buy-out funds need to be reassessed on both internal and public relations, to take a more proactive approach to winning over employees and by extension the public.
Nick Murray-Leslie is director of Chatsworth Communications, an agency specialising in financial PR