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).
Robert Toms, managing director of Smedvig Capital, a small to mid-market buyout firm, explains that the rising price of targeted companies is another important factor pushing growth strategies and marketing further up his industry's list of priorities. 'The growth of private equity has increased competition for attractive targets, so the obvious financial restructuring rewards are now being factored into the price we are asked to pay.' This, he adds, is forcing private-equity companies to become smarter, placing greater emphasis on organic growth strategies.
This change in investment strategy has resulted in private equity firms hiring staff with different skills. 'Private-equity houses used to be home to ex-bankers and accountants whose comfort zone was financial,' says Spencer Skinner, a founding partner of Active Private Equity. 'Now strategy consultants and former managers to whom organic growth is not an alien concept are joining in their droves.' He adds that 'the companies we acquire can expect to benefit from the management expertise that many private-equity houses now have to offer'.
Marketing can have an important role to play, but marketers working with private equity must realise that the demands on them may be very different from those experienced before. Private equity-owned businesses are a different beast to a plc, not least because they demand superior returns. KKR, one of the biggest buyout firms, has an annual rate of return of 27% - almost three times that of the stockmarket average.
Speed of decision-making is one of the virtues of private- equity ownership that the marketing function can enjoy. Businesses owned by private equity have one, or at most a handful of owners, unlike public companies that may have many thousands of investors and a management structure full of checks and balances to protect their interests. This makes it easier and quicker for private equity-owned businesses to take big decisions; this same fleetness of foot will be expected of the marketing department and the agencies that serve it.
When M&C Saatchi was hired by MFI in early November last year, just after the furniture chain was acquired for 拢1 by Merchant Equity Partners, it was asked to create a campaign quickly. The result was a fresh strapline, 'Quality Built In', which launched by Christmas - an incredibly quick turnaround. As a result of its experiences with MFI and Halfords, which is also private-equity owned, M&C Saatchi has set up a division called Accelerator to deliver a service tailored to the needs of this new type of business owner. 'Private-equity owners want quick results and transformational ideas,' says M&C's chief executive Tim Duffy. 'The marketing industry can deliver both - though the priorities may be different to those of our other clients.'
One reason the priorities are different is that private-equity firms have a clear idea of when they want to exit the investment, and this affects the marketing. Because their objectives are focused on relatively short-term returns, long-term brand-building may be sacrificed for tactics that yield more immediate results. 'Most private-equity acquisitions have a three- to five-year time frame in mind and they will weight their investments toward initiatives that yield a return within that period,' says Greg Infeld, a former marketer and one-time chief executive of private equity-owned Singer Sewing Company. 'For marketing, this probably means the budget will be allocated to sales promotion rather than brand development.'
This approach may not suit marketers who prefer to take a long-term view of the brand. In some private-equity deals, once the brand has been sold on, cracks begin to appear in the business (see Debenhams case study).
It would be a mistake to assume that because private-equity firms value what they can offer, marketers can relax. Robert Toms, managing director of Smedvig Capital, argues that every department should expect to be scrutinised. Marketing will need to demonstrate how it can contribute to the growth of the business. As another private equity investor puts it: 'My advice to any marketing director who learns of a new private-equity owner would be put a damn good presentation together.'
One current marketing director in the grocery sector who used to work for a private-equity firm warns marketers to expect their plans to be analysed in some detail. He believes marketing is often perceived as being driven by something other than logic and sound commercial rationale - and so needs to work extra hard to convince the new owners that there is a good reason for every element of expenditure. 'In my experience, where private-equity owners cut budgets or redirect spending, it is usually with a view to maximising value, often removing previous spending which had little or no rational grounding or economic benefits,' he says. 'Marketing directors have little or nothing to fear from private-equity firms where they can create value; in fact, quite the reverse is true because they should be even better compensated for creating that value.'
Far from being the corporate pirates of popular imagination, private equity offers marketers some interesting opportunities. As the sector matures, buyout firms are having to look beyond financial engineering to add value to the businesses they acquire in order to generate the returns they want. In this environment, bold ideas backed by a persuasive rationale may have a more receptive audience than ever before.
While the demands of private-equity owners may not always be conducive to long-term brand-building, the idea that private equity will ignore the marketing department is flawed. If marketers fancy a challenge and a business with deep pockets, private equity-owned firms could be the way forward.
CASE STUDY: DEBENHAMS
The purchase of Debenhams by a private-equity consortium of Texas Pacific, CVC and Merrill Lynch was heavily leveraged with debt, with less than 拢600m of the investors' own money at stake. Every saleable asset was immediately sold then mortgaged back, raising more than 拢400m through property alone, which was quickly pocketed by its new owners. By the time the private-equity investors relisted the business three years later, they had quadrupled their money.
It is often ignored that Debenhams was purchased at a 38% premium to its stock-market value at the time, with the consent of its shareholders. It also benefited from impressive top-line growth during its period under private-equity ownership. Revenue grew by 15% and margins by a similar amount.
However, since the business was floated back on the stock exchange last year, cracks have appeared. Goldman Sachs has argued that cuts to store refurbishments and high levels of promotional activity have damaged the brand, despite the short-term increase in sales and margins.
DOS & DON'TS
Do recognise that private-equity investors are active investors.
Do make a clear case for how the marketing department can foster organic growth and return on investment.
Do justify how your marketing team can contribute to brand-building using empirical data and non-empirical evidence.
Do inspire with an exciting vision for marketing-led growth.
Don't assume the worst. While cuts to marketing spend may occur, they are likely to be efficiency-driven.
Don't expect things to stay the same. Private-equity firms look for quick, simple but effective marketing activity, so you will have to adapt the way you work.
Don't expect the new owners to care about the brand's future beyond five years.
Don't do nothing. Whether you like it or not, the company has been taken over for a reason.
CASE STUDY: AA
The AA was purchased by venture-capital firms CVC and Permira from Centrica for 拢1.75bn in July 2004 and could soon fetch 拢3bn for its owners in a sale or flotation, barely two-and-a-half years later.
Its new owners provoked outcry when they bought the business and promptly made about 10% of the workforce in loss-making units redundant. However, marketing spend on the brand increased, with the successful revival of the 拢18m 'You've got AA friend' campaign from DLKW.
This campaign demonstrated the new owners' understanding of the value that can be derived from a well-managed investment in marketing, focused on increasing short- and long-term value through effective brand-building. In doing so they have shown that restructuring and marketing-led brand development are not as incompatible as some critics like to suggest.
The high price of 拢3bn that the owners are reported to be asking for the business partly pays tribute to the investment made in the brand.
ESSENTIALS
PRIVATE EQUITY - The term 'private equity' is a near-permanent fixture on the business pages, but what it means can vary widely from deal to deal. There are generally three types of private-equity deal: venture capital, mid-market and leveraged buyouts. The focus of the first two tends to be organic growth, while leveraged buyouts, which involve debt, often include financial re-engineering to secure profits.
VENTURE CAPITAL - Investment in a very young business or even a start-up. This is the riskiest type of investment and the sums raised through venture capital are correspondingly smaller - roughly 拢500k-拢3m.
MID-MARKET - Smaller private-equity deals involving the acquisition of businesses with existing income streams. They might be small and proven businesses that need capital to scale up, or small, mature businesses that have plateaued and need an injection of cash and new management to spur them on. Typically, the mid-tier firms are not asset-rich - they don't tend to have a portfolio of hundreds of retail outlets around the country - so can't be bought through debt, as there is nothing to secure the debt against. Sums raised would be in the region of 拢3m-拢30m.
LEVERAGED BUYOUTS - These are deals for large, mature, asset-rich businesses, either because the new owner believes they can run the underlying business better if, for example, growth has levelled off, or because they have recognised a financial arbitrage - when the financial structure of the business is stopping it being valued correctly. The reason only the big acquisitions can be 'leveraged' buyouts is because security is required to take out a big loan, and the big, mature businesses are more likely to have this. Sums raised could be anything from 拢50m to 拢10bn.