Buyouts: The Truth about Private Equity

Marketing, April 4, 2007 | Go to article overview

Buyouts: The Truth about Private Equity


With heightened competition driving up the price of attractive targets, buyout firms are learning the value of building a brand.

Asset strippers, barbarians, raiders, locusts - not the most flattering terms to be applied to a new boss. But these are just some of the words often applied to the private-equity houses that are fast taking over Britain's brands.

A spate of ambitious acquisitions has seen buyout firms rapidly become major players in the world of consumer brands. They already run businesses including Iceland, Kwik Fit and United Biscuits and recently added leisure business Tussauds Group and Burton's Foods, which owns Jammie Dodgers and Wagon Wheels. They have also been circling Sainsbury's and Boots. The volume of assets controlled by private equity is forecast to double over the next five years, according to Private Equity Intelligence. Unions are furious; the City is drooling - and the trend has important implications for marketers.

The concept is simple: a private-equity house raises capital, buys a business - often removing it from the stock market - then restructures and floats or sells it, making huge profits. It is not a new model, but what is changing is the companies in their sights. With big-name brands on the shopping list, marketers and private equity are rubbing shoulders as never before.

Given private equity's reputation, ruthless asset-stripping and cost-cutting could be expected to take precedence over organic growth and marketing. But advocates of private equity such as the BVCA, the industry's trade body, reject such a view. It points to its recent Economic Impact Survey, which shows that the growth of sales in private equity-backed companies was considerably higher than FTSE 100 and 250 companies. If private-equity owners really do value top-line growth, maybe they need marketers after all.

Not everyone thinks that way. Tapestry, a leading London ad production agency, decided to conduct research across major ad agencies to find out how the industry feels about the growth of private equity, what the future may hold and how marketers should respond.

The results reveal a high level of anxiety about the impact of a takeover on marketing. Only 3% of the agencies interviewed believe that private-equity houses place organic growth at the top of their list of priorities for the firms they acquire. About 97% believed that private equity was more likely to acquire a company, rip out the cost, load it with debt and then sell it. The vast majority (94%) believes that these buccaneers would probably squeeze their marketing budget, with the remainder expecting no change. Not one respondent predicted increased investment in marketing.

In reality, private equity splits into three broad categories; venture capital, mid-market and headline-grabbing leveraged buyouts (see panel). In the first two instances, the investment is based around growth in the business, with marketing at its core. Active Private Equity, for example, bought Soho House and food-delivery service Deliverance with growth in mind, as did Bain Capital when it acquired Samsonite.

But what about the large leveraged buyout houses, of the type circling Sainsbury's? Are they the asset-strippers of common belief? A member of one of the biggest and most high-profile private-equity houses says: 'Restructuring forms an important part of our strategy, but it is not the sum total of our agenda. It is the low-hanging fruit - and the bit that yields the most certain return. Once we've done that, we'll want to maximise our investment and do everything we can to improve the performance of the underlying business.'

The AA is a good example of a major leveraged buyout that has turned to marketing to help maximise its investment. It instituted a cull of almost 10% of the workforce, but since then its marketing has been revitalised and organic growth has been the focus. Mark Lund, chief executive of DLKW, which has worked with the AA for the past two years, says that the private-equity owners are 'outstanding marketers and have brought confidence and clarity to the work we have done' (see case study). …

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