Article n°6 - 6 min
Why Should Private Equity Firms Invest In Branding?
A stronger deal flow
An insurance policy during market downturns
Higher valuations of portfolio companies and exit multiples
A tool for small to mid-market firms in a growing and competitive market
Building a brand is about being clear on your unique advantages and separating yourself from the rest. Focusing on a specific sector expertise can be a very effective brand strategy to attract the right investment opportunities and become the go-to PE firm within a specific niche (a PE firm based in Texas focuses sustainability in infrastructure investments for example).
Research has shown in every industry that companies that have invested in branding showed smaller drops during the financial crisis and rebounded faster.
Branding is a sound investment during high-growth and low interest rates environments, but it comes a necessary one during market downturns where investors seek reassurance that your firm has what it takes to weather the storm and why they should stick with you.
Firm that solely focus on their performance as an advantage struggle to maintain that strategy in a crisis because they have nothing to fall back on.
A strong PE brand has a direct impact on the valuation of the very companies it has stakes in - resulting in greater returns. This is called the halo effect and it allows firm to attract more sophisticated buyers and sell portfolio companies at a premium.
Some firms are taking it one step further and hiring a brand consultancies to help their portfolio companies with their own brands. This makes it easier to establish a clear connection between the portfolio company and the PE parent and to boost revenue and the valuation of portfolio companies.
The growth of the private equity market isn’t slowing down.
Like in any competitive market, standing out and becoming the firm of choice is particularly challenging and the PE industry is no exception.
Most firms focus on features i.e performance (which are not good indicators during market downturns) and not on other ways they can provide value to investors.
Value propositions are unclear and not unique. Branding is about solving these issues.
Another challenge facing the private equity market is its high asset concentration. Legacy firms like Blackstone are dominating the industry and have strong reputations which allow them to keep attracting more and more investors.
Branding is therefore a crucial investment for small to medium firms that don’t have the reputation and track record of those legacy firms but who want to grow their AUM sustainably.
Branding for these firms is about giving them the tools and confidence to punch above their weight and to communicate their unique value to investors i.e stronger and more personalised investor experience, expertise in a specific area etc.
Smaller players want to get noticed and want their strengths to be recognised.
Branding can help them achieve that.
Especially for small to mid-market firms, a healthy brand can boost deal flow and save time by removing the need for multiple auctions, easier negotiation on term sheets and a big insurance against ending up competing on price.