The trade unions hate them.
Investors love them.
The German Government refers to them as "heuschrecken" or locusts.
The Economist describes them as a “superior model of capitalism”.
They own big brands like Iceland, Kwik Fit and United Biscuits and they may soon get their hands on even bigger ones like Sainsbury’s and Boots.
Private equity is suddenly everywhere.
The concept is relatively straight forward: 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 they then 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 rather privately owned with 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 different types of private equity. The first, venture capital, focuses on buying a stake in a small business and then injecting extra capital and expertise into the organisation in order to grow its value. But it’s the other form of private equity, in which a fund acquires a large existing company, which is currently 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 for 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 Travel Lodge, the private equity fund actually recognises that the brand has a lot more potential than its current owners appreciate. Money is invested into the brand and the company grows. Unfortunately there are also other, frankly more reliable methods, to make a profit on your newly acquired company. You can identify a big brand like the AA which has lots of overhead and infrastructure and a relatively captive consumer base. You can then fire 3,000 staff without having any immediate negative impact on sales but a very positive impact on profitability. You then make an enormous performance based profit and even more money when you off-load the newly streamlined company which may or may not prosper in the future. I
t really is a tale of two equities. On the one hand private equity can represent a very beneficial force for brand revitalisation and investment. On the other it can resemble the old asset stripping era of the 1980s. Confusingly, most private equity funds can play either role depending on which will deliver the most profit. There are no black hats and 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 have not got 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 can take a matter of months. It’s all too easy to forget about brand equity during these frenetic ownership cycles.
Our challenge is not to debate the relative merits of private equity ownership. Let’s leave that to the unions and the politicians. Instead, let’s help our new masters appreciate (in both senses of the word) the value of the brands that they have acquired.
