Nothing like a timeline to focus the mind

x Sponsored content on Research Live and in Impact magazine is editorially independent.
Find out more about advertising and sponsorship.

In his 1952 book, Relativity and the Problem of Space, Albert Einstein introduced the concept of ‘happening and becoming, not being suspended,’ and that ‘the only reason for time is so that everything doesn’t happen at once’. This isn’t strictly true of the private equity (PE) industry, but it does have a different notion of time from many public limited companies (PLCs) that shapes its culture and gives it the ability to operate with a freedom many trade owners would die for.  

Why is the model different? Rather than raising investment on the stock market, as PLCs do, PE firms raise funds from institutional investors, such as pension funds, insurance companies, endowments and high-net-worth individuals. The aim is to provide a return to investors within, typically, a three- to five-year timeline. No sooner has PE acquired a business than the new owners are thinking about an accelerated growth plan, typically doubling the size of the company and demonstrating long-term value drivers for future investors.  

Caroline Dent, an investment partner at London-based PE firm ECI Partners, one of our clients, says: “PE ownership impacts the culture of a business across a number of dimensions, including pace and incentivisation. There is a desire to get things done to create capital value within the timeframe – and PE deals are typically structured to align the incentives of the investor and management team. So it’s in all stakeholders’ interests to drive and accelerate growth.” 

The industry is growing in significance. Over the past decade, UK private equity has generated returns of 14.9% for shareholders – nearly double that of UK pension fund assets and the FTSE All-Share, which generated returns of 7.8% and 7.6% respectively, according to the British Private Equity and Venture Capital Association. In 2011, it was estimated that 3,800 companies, employing more than 500,000 people in the UK alone, were PE-backed. 

We work with PE at the point of sale or acquisition, conducting market, consumer and brand due diligence (DD). This is to identify untapped potential in a brand and the opportunities that will accelerate growth. It includes an Accelerator Brand Plan, setting out the brand direction, the consumer, and category and innovation strategies. 

PE often receives a bad press – it’s easy to bash the ‘money men’ – but other companies can learn a lot from how it uses market research and insight.  

The characteristics that set PE apart from trade owners, and  foster a spirit of entrepreneurism, are:

• 
  A shared vision, without the politics that can slow down decision-making
• Brand builders not asset strippers – smart PE houses know that value creation comes from providing resource, not stripping back
• Considered investment with cash available for the right things
• Rapid decision-making 
• Support and devolution for management team. 
  
  

Increasingly, PE recognises the importance of investing in the brand and consumer strategy, to maximise long-term value. So grounding growth opportunities in insight is key to giving investors the confidence to invest, with a refreshing focus on the commercial decision-making that can be derived from insight, rather than the insight technique itself. 

As Dent says: “The actions a business takes on the consumer and brand front need to deliver on a longer-term basis to ensure an attractive multiple can be obtained at exit.”  

Time is clearly of the essence within the PE model, but this doesn’t mean corners are cut or opportunities are not built robustly. 

Chris Peck is driving the turnaround strategy for West Cornwall Pasty Company, bought out of administration by Endless Private Equity two years ago. He says: “Ill-considered brand investment can go wrong and lose time. Therefore, getting good consumer insight on the brand, and a reality check on where the brand really sits, is vital.” 

So everything doesn’t happen at once, upholding Einstein’s theory of relativity, but PE is an exciting and rewarding industry to work for because it is always on a mission to make things happen. 

Chris Molloy is founding director of Brand Potential.