In the course of the past week Lance Armstrong – cancer survivor and seven-times Tour de France winner – and Sir Jimmy Savile – knight of the realm, cherished children’s TV presenter and titan of philanthropy – have both had their legacies unceremoniously (literally, in Savile’s case) smashed to smithereens.
Of course, the value attributed to “good character” has been long understood in the world of celebrity. It’s far from a nebulous concept and the financial ramifications of a ravaged reputation are abundantly clear – just ask Tiger Woods, Chris Brown or Kerry Katona.
But private equity firms have been far slower to acknowledge the importance of public perception. Indeed, with the macroeconomy in meltdown and portfolio companies fighting to stay upright amid a pernicious regulatory clampdown and a leverage and fundraising drought, it’s not hard to see why the prying eyes of the media may have been dismissed by firms as an inevitable irritant.
But, as August Equity’s Funeral Services Partnership gets the TV exposé treatment after undertakers are secretly filmed singing offensive football chants to corpses, while 3i gets caught out when paedophiles are found to be using Habbo Hotel, a social networking site for teens, the true cost of bad publicity is becoming increasingly apparent.
Indeed, following the Southern Cross and Winterbourne View care home scandals, some investors have decided to steer clear of potential minefields such as health and childcare services altogether, yet the causes of controversy are not always so predictable. For example, Could Apax Partners have reasonably anticipated that a McKinsey-endorsed hike in the price of cottage cheese at Israeli portfolio company Tnuva would lead to a nationwide boycott?
And what of Atos Medical, whose role in trimming disability benefits in the UK led to much invective over the course of this summer’s Paralympic Games? No link appears to have been made to Nordic buyout owner EQT so far, but surely it is only a matter of time.
Of course, the financial upshot of a media offensive can range from costly PR bills to a drop in revenues, or the enactment of legislation that materially affects returns. But it’s in the field of fundraising that the true cost of scandal can really hit home.
Limited partners, chief among them pension funds, are acutely sensitive to the risk of reputational damage and have upped the ante on environmental and social governance issues ad infinitum.
A skeleton-free closet and a foolproof strategy for avoiding obloquy have become vital to a successful fundraising campaign. Indeed, with the very future of firms resting on a squeaky clean image, the threat of tabloid justice has become one of the defining forces shaping private equity today.
Let battle commence
Because nothing is more important right now, of course, than a firm’s ability to close a fund. To say that wooing limited partners is a matter of survival is no exaggeration.
With the total flow of capital into the asset class slowing – and, more crucially, investors taking tough decisions to pare down the number of general partner relationships in their portfolios – it’s clear that for every winner there will also be losers.
Indeed, as a glut of private equity managers hit the track, many of whom are largely indistinguishable from one another, LPs that may once have bet each way are now backing this race on the nose.
The result will be a series of battles between identikit buyout houses vying for the same pot of cash. The UK mid-market in particular is littered with me-too offerings, while in Spain, for example, N+1 must face up to both Mercapital and Portobello Capital at a time when LP money destined for the Med is in short supply.
In the next issue Real Deals will dissect these and other head-to-head contests, assessing the rivals’ strengths and weaknesses and weighing up which firms we believe will be victorious. Whether you’re a GP or an LP, this is one not to miss. Fundraising just got personal.