City sitdown: Private equity should learn to be more emotional, argues City grandee
Whether you like it or not, private equity is a significant part of the UK economy and accounts for almost 50 percent of all deal value, double the level from just five years ago, according to a recent deal analysis from PwC.
Its fingerprint has been all over household names including Asda, the AA, Morrisons and Debenhams, for better or for worse.
And while deal-making may have slowed in recent months, PwC believes that despite economic and other headwinds, there are still “opportunities for dealmakers to generate healthy returns.”
But there is definitely room for improvement when it comes to the way private equity conducts itself.
Recently, the House of Lords debated a motion brought by Lord Prem Sikka to take note of the economic and social risks created by the regulation and practices of private equity.
Time for Morning Wire to sit down with a private equity whiz and long-time City insider, FreshBritain’s founder and co-owner, Bob Sheard, who has spent his career advising iconic businesses such as Dr Martens, Levi’s and Salomon, together with their private equity investors, on how to drive value at market-beating speed, via a “precision brand design” approach.
Private equity investors and marketers view a brand from very different vantage points; there is plenty of potential for misunderstanding and worse when the two worlds collide, Sheard kicks off with.
But they both fail to take seriously the emotional value of the brand, its human connection with the people who buy it, therefore damaging the value of the investment as a result, he argued.
“They potentially ignore 50 per cent of the tools available to them to drive value. They pour a load of effort into building a strong rational case for their brand, focusing on features and benefits and what it does better than any other brand, what we call “rational superiority”, but they forget to engage in the other bit of the equation, the right brain stuff, which is “emotional superiority”, or what it is about a brand that means people are drawn to it.”
“A brand with emotional superiority is able to forge an addictive personality which in turn drives profitability, because people will buy it and pay a premium for it, which in turn informs multiples of value and final enterprise value.
Bob Sheard
Sheard found over the years that both marketers and investors ignore the emotional side of the brand’s connection to its consumers because they don’t understand storytelling.
“That’s short-sighted, especially in marketers, and my advice would be to get emotional, get human and do it fast, so you have the best possible chance of turning a brand around,” stated Sheard.
There is another accusation that private equity has flung at it, and that is short-termism, essentially polishing the apple to generate scale and value in as short a time as possible, let’s say five years, given a fair wind.
But increasingly there is a call for investors to consider both the future their investors are investing in now, based on today’s assessment of where the world is heading; and the future they will exit from, or what the world will actually be like five years from now.
Sheard thinks of it like this: “Investors need to plan for two futures, the initial future and the future, or in other words what the world looks like upon exit. If that full picture is neglected, including the emotional brand futures, then value may not be realised.”
Currently PEs are not really aligned to see past five years, but they should really get to grips with running a twin track of medium and long term aligned strategy and decision-making, especially in a world that is moving so fast.
“Private equity investors are desperate to find interesting stuff that’s still off market.”
Bob Sheard
In terms of the broader outlook for PE investment, there is a clear shift away from riskier consumer brands and an ever-greater emphasis on health and tech (well, certain kinds of tech) as well as food, which the pandemic demonstrated as a safe bet.
“Yet there is an irony here. Get any PE speaking honestly and they will bemoan the fact that much of the “exciting stuff” is too small for them, sitting within the VC community.”
He continued by saying that “the constraints of the PE business model mean that’s a given; the time and effort required to manage a deal and build value in a brand is the same, regardless of whether it has an enterprise value of £10 or £100m.”
Finally, Sheard said that: “Private equity investors are desperate to find interesting stuff that’s still off market.”
“In which case they should be investing in a stronger ecosystem so as to find these emerging VC brands that are getting to the scale that they need to be for PE consideration, and crucially before they go onto the open market,” he concluded.