Brand getting lost in private-equity haste

The trade unions hate them. Investors love them. Germans refer to them as locusts. The Economist describes them as a ‘superior model of capitalism’. They may soon get their hands on even bigger ones like Sainsbury’s and Boots. Suddenly, private equity is everywhere

THE concept is relatively straightforward: a partnership of business brains raises a load of investment capital from pension funds, wealthy individuals and their own pockets. Then they go out and buy companies, often taking them private in the process. As soon as possible after this, they sell the company or float it on the stock market and make a sizeable profit for everybody involved. The term private equity simply connotes the fact that the acquired companies are not publicly listed on the stock market, but privately owned through the money raised from investors. The absence of public shareholders also means that the industry is notoriously secretive about its aims, operations and profits. Essentially, there are two types of private equity. The first, venture capital, focuses on buying a stake in a small business and injecting extra capital and expertise to grow the company’s value. But it is the second, in which a fund acquires a big company, which is making all the headlines. Central to any private-equity acquisition is the premise that the purchased company can be sold for more than it was acquired in a relatively short amount of time. The problem comes when you begin to explore exactly how this profit can be realised. In some cases, notably New Look or Travelodge, the privateequity fund actually recognises that the brand has far more potential than its current owners appreciate. Money is invested in the brand and the company grows. Unfortunately, there are other, frankly more reliable, methods enabling these groups to make a profit on their newly acquired company. They can identify a big brand such as the AA, which has lots of overheads and infrastructure and a relatively captive consumer base, and fire 3000 staff with no immediate negative impact on sales and a very positive one on profitability. They can then make a huge performance-based profit and even more money when they offload the streamlined company, which may or may not prosper in future. It really is a tale of two equities. On the one hand, it can represent a very beneficial force for brand revitalisation and investment. On the other, it can resemble the old assetstripping era of the 80s.Confusingly, most private-equity funds can play either role, depending on which will deliver the most profit. There are no black or white hats in this game, just lots of grey suits. I’ve worked for private-equity firms several times during big-brand acquisitions. I can happily report that, like every other major player in the corporate finance world, they pay extraordinarily well and don’t have the faintest clue about branding or brand equity. Indeed, whenever the dreaded ‘b’ word comes up, noses wrinkle and eyeballs head skyward. Pace is the big danger for brands in this new era. The success of private equity depends upon rapid acquisition, fixing and divestment; often, the whole process takes just a matter of months. During these frenetic ownership cycles, it’s all too easy to forget about brand equity. Our challenge is not to debate the relative merits of private-equity ownership - let’s leave that to the unions and politicians. Instead, let’s help our new masters appreciate (in both senses of the word) the value of the brands they have acquired.

Courtesy: EconomicTimes

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