Marketing your money

Now that you've raised a new fund, how do you convince stellar companies to accept your capital?

While marketing has played a key role in generating brand awareness and loyalty for many industries, most private equity GPs have traditionally not followed this route to generate business and boost returns.

?The attitudes tend to be very old school, and many GPs consciously strive to keep a low profile,? says Emma Payne, founder of the newly launched EVP Marketing, a UK-based outsourced marketing firm catering to private equity firms. ?The intrigue and the quiet, unknown status is more powerful to them. These [GPs] pride themselves on being very intellectual, professional and private.?

Certain GPs have the luxury of having a recognized brand without having to engage in much marketing, particularly if their deals speak for themselves, or if they are affiliated with an illustrious and well known entity or person. For instance, apart from distributing press releases on transactions of note, rarely would one of the mega-buyout firms feel the need to engage in a full-out marketing campaign to generate brand recognition among their target audience. KKR, Permira – these names are known to all.

?We tend to do everything by word of mouth, and by direct contact by the GPs,? says an in-house communications professional at a large buyout firm. ?Deal flow alone acts as a marketing tool for us.?

?People generally know who we are,? according to a source at another buyout giant. ?We don't have a marketing budget for this type of thing, and our in-house marketing professionals all work on IR-related functions. From a return on investment standpoint, [marketing is] not worth the effort for us.?

However, within the more liberally populated spheres of the middle market within the US and Europe, the competition is much stiffer, household names are fewer and the returns on marketing investment become more apparent. It is within this setting that more private equity GPs are gradually turning their eyes toward the use of marketing to differentiate themselves from the masses of competitors.

Cutting through the clutter
For Sovereign Capital, the goal of marketing efforts is to build awareness, knowledge and positive brand recognition of the firm, but primarily to generate deal flow, says Julie Sieger, who heads the marketing efforts at the UK middle market buyout firm. ?If you miss out on a deal in a sector in which you specialize because the intermediary or management team has simply not thought of you, then the marketing effort has failed.?

Another enthusiast of using marketing to build dealflow is The Riverside Company's co-chief executive Béla Szigethy, a transatlantic firm based in Cleveland and New York which focuses on buying smaller companies at the lower end of the middle market. ?That's what we've been doing for 18 years, and that's what we plan to do for the next eighteen years,? says Szigethy. ?We try to pound that message very hard so that anybody with a company for sale in our target size range gives us a call.?

?The biggest challenge for any buyout firm in North America is too much clutter,? says Szigethy. ?There are so many competitors on top of one another that it's hard to stand out.?

Supporting Riverside's marketing efforts is an annual budget that is at the ?multimillion dollar? level, according to Szigethy. Most of the budget is used to compensate the firm's team of deal sourcers, who go out to brokers, intermediaries, investment banks, lenders, lawyers, accountants, and owners directly. ?They literally have thousands of contacts in their database and make thousands of phone calls and visits each and every year to drive in deals,? says Szigethy.

One never knows when or where a company for sale might be found, adds Szigethy, who emphasizes the importance of having solid marketing and branding strategy, centering on a clear and understandable message. ?Once you get [the message] right, the rest of it is execution, and that's a bit easier,? he says.

As a GP's name recognition among its target audience grows and the marketing campaigns build up momentum, the challenge then becomes maintaining that momentum. ?We use constant repetition to keep our name familiar and front of mind, particularly in the highly competitive mid-market,? says Sovereign's Sieger.

?Once you get [the message] right, the rest of it is execution, and that's a bit easier.?

Applying the toolset
As is the case in many industries outside of private equity, marketing can be effective in not only building, but also repairing a firm's reputation among its target audiences. It can also be used to help a firm expand into a new sector, a new geographic area, and other previously unexplored frontiers. ?The question to ask is, ?What do you do if you want to get from here to there in two years??? says Jennifer Jones, a Woodside, California-based strategic marketing consultant to a number of venture firms.

In the case of Riverside, the firm expanded its US-based operations nine years ago to encompass the European midmarket as well. ?We want to be as strong as any of the local competitors in each country where we operate,? says Szigethy. ?It usually takes a number of years – about three – to build up our brand name in a local market to a level where we can drive deal flow to the level at which we're satisfied.?

Sovereign Capital had to build up brand recognition from scratch when it renamed the firm in 2000 and shifted the investment strategy from early stage venture and development capital to lower mid-market private equity. ?At Sovereign, we see the marketing function as a key tool for communicating with our different audiences,? says Sieger.

To achieve these types of objectives, there is a pretty well defined toolset at GPs' disposal, particularly ?because you are dealing with a very intangible product, and with very few differentiators between GPs,? says EVP's Payne. The range of marketing tools available to GPs typically includes the following:

Marketing professionals: If a GP includes the staff it employs to market the firm and bring in new deals for investment, then this will likely be high up among the line items on that firm's marketing budget. For instance, Riverside employs ten full-time professionals to market and bring in new deals for investment, of which eight are housed in the US and two in Europe. These professionals focus on sourcing deals and are distinct from those professionals handling Riverside's transactions or operating the firm's portfolio companies.

?The vast majority of Riverside's marketing budget goes to salary and bonuses and compensation for our marketing staff,? says Szigethy, adding that the firm's marketing staff has seen significant growth over the years, and will continue to expand as Riverside builds up its presence outside of the US.

Public relations firms: For many firms across the buyout and venture worlds, ?marketing? is synonymous with ?public relations,? and PR is the extent of their marketing efforts. ?Often, PR is the way for firms to dip their toe into the marketing waters,? says Payne.

?They get more bang for their buck, and the visibility in the press translates into corporate visibility,? says Jones.

That said, providers of PR services, if kept on retainer, also have the potential to take up a major chunk of a GP's marketing budget.

?In the UK, you're probably looking at a £24,000 retainer before you start being of interest to a large PR company,? says Sovereign's Sieger. ?Public relations is important to us, but when you are a small firm, you need to ensure that your budget works hard for you.?

Jones also warns that, while it is important to build good relations with ?the various publics,? it is also important for GPs to approach marketing as a process – one that takes into consideration the firm's needs and business objectives. ?You can't just do PR, and say, ?Let's just address this through the press.? Rather, firms need to ask themselves, ?What can we do differently to change this perception???

Events: Another high-figure line item on the marketing budget is the cost associated with organizing events, such as CEO events that are designed to help GPs develop closer relationships with their portfolio. ?In many cases, CEO events become a pretty major budget item, so most firms will hold one every other year or every three years,? says Jones.

?We organize our own events and are very targeted in who we invite,? says Sieger of Sovereign's mentality toward this type of marketing. ?This enables us to take a bespoke approach.?

?Entertaining and profile building for the key partners have always been important,? says Payne. However, she adds, while such events have tended to be done on an ?ad hoc? basis in the past, GPs are beginning to realize that they can get better results by hosting more targeted events and catering to ?the right balance of participants.?

Advertising: At Riverside, efforts on the advertising front tend to serve the purpose of either boosting the firm's good name, or promoting portfolio companies that might be looking for add-on acquisitions, says Szigethy. Here, the mission is creating a brand and stimulating awareness of it by the target audience, typically through print advertising and appearances at conferences and trade shows where potential acquisition targets might be found.

At Sovereign, advertising is recognized as an important tool that enables ?guaranteed communication? on a regular basis, says Sieger. However, free advertising through press coverage is also welcomed. Says Sieger: ?We all recognize the power of the press, and positive editorial comment is very valuable.?

Direct marketing: Another approach to marketing is direct marketing, where a GP sends out self-generated – or outsourced – publications and other print materials to its relevant audience. Firms that aggressively engage in direct marketing might push out ten or more such mailings each year.

According to Payne, an area of marketing that has become increasingly popular over the last five years is the corporate magazine. ?Quite a few firms are producing these at a high expense,? she observes. However, ?I think the market is now saturated with these magazines, as the corporate finance firms are also producing them, so each month people are swamped with unsolicited literature.?

Market studies: GPs are also increasingly utilizing – and spending more money on – market surveys and perception studies. ?They realize that it is important for them to understand how they are viewed in the market,? says Payne. ?Following on from this will hopefully be a spate of marketing activity to address the findings.?

When Jones engages in initial research on behalf of a firm, she talks with the client's ?ecosystem? – portfolio companies, the deals that got away, the LPs, investment banks, attorneys, and other constituents of the GP's key audiences – to learn about the perceptions they hold regarding the client in question. ?I'm the messenger for what the market's thinking,? she says.

This type of effort tends to require a significant allocation of time and effort that might exceed the capacity of even those GPs with in-house marketing professionals, says Jones, who describes the process as taking roughly three months and involves speaking with sixty people.

The marketing bottom line
When it comes to marketing spend, ?Ultimately, our bottom line is the pace of investment and the quality of deals that we're seeing,? says Riverside's Szigethy. ?It's a deal machine, it's a volume shop, and we pay a lot of attention to our metrics every step along the way.?

For direct marketing, a typical way to measure the success of such efforts would be to incorporate a request for replies from recipients, and then measure the volume of those responses. In those cases, a three percent response rate tends to be viewed as a success, although higher rates can also be generated by offering incentives to respondents.

In terms of events, the relevant metrics to monitor would include the rates of acceptance/decline, attendance/nonattendance ratios, followed by tracking the deals that come in from the individuals attending those events, says Payne.

Some GPs also commission market research studies, which can shed light on not only how a firm should structure its marketing strategy – as described above – but also on the fruit borne by the marketing efforts. Such studies, while expensive to execute, are likely the most effective metric for marketing effectiveness. Both Riverside and Sovereign engaged in separate such efforts roughly 18 months ago, to measure awareness of their firms within their target audience.

?We wanted to measure the intermediaries' perceptions and understanding of Sovereign and to find both the positives and negatives associated with our firm,? says Sieger. ?We had 94 percent brand recognition, which indicated that our targeted marketing efforts were being effective.?

According to Szigethy, Riverside's market research study targeted small deal brokers in North America. The results were welcome news for Riverside, showing that the firm was recognized as the ?number one? firm at the lower end of the US middle market, he says.

Increasing interest
Marketing continues to comprise a very small fraction of GPs' overall budgets, although there are indications that more firms are beginning to rethink their approach toward this topic. ?Even the very marketing-oriented [GPs] spend very little compared to the consumer industry,? says Payne. ?It can be frustrating because the funds spent on fundraising – for example, on placement agents – are astronomical to what the marketing budget would be.?

For those GPs that are currently actively engaged in the marketing process, the budget allocated marketing spending tends to grow at the pace of the firm in question. In the case of Sovereign, the marketing budget has increased over time, in line with the growth in fund size and funds under management. Szigethy describes a similar scenario at Riverside: ?We would like to see [Riverside's marketing efforts] be significantly larger than what we see today, as we build fund size and assets under management.?

Overall, GPs attitudes do seem to be shifting – albeit slowly – in favor of increasing their marketing efforts. Those marketing professionals at private equity firms that have to date have engaged in significant marketing campaigns are now beginning to receive calls from other firms that are looking into a potential expansion of their own marketing efforts.

That more GPs are engaging in perception studies and seeking out professional marketing expertise are also indicators of increasing interest in this field, says Payne. She has seen a trend among middle market GPs to have on staff a marketing person who also supports the firm's investor relations and fund raising activities.

?This is a sensible move, as the brand awareness marketing needs to appeal to all the firms' audiences,? says Payne. One of the challenges that the marketing point person at a GP will likely have to manage is making sure that a consistent, unified corporate message is being sent out by all individuals of the team.

Another issue to be faced is justifying the marketing spend to not only the powers-that-be at the GP, but also to the firm's investors. ?If GPs are behind, then LPs are ancient in their thinking about marketing,? says Payne.

In the end, the adoption of greater marketing activities on the part of GPs will likely be driven by the desire to tamp down on opportunity costs. As Sovereign's Sieger says, ?The market is getting tougher. Anything that supports deal flow will have to be considered by the management team.?