Public perception crises have historically been a key concern of publicly traded companies interested in maintaining shareholder confidence and bolstering stock prices. In contrast, private equity firms have tended to shy away from public attention.
However, a number of recent, highly publicized fiascos in the private equity space – such as the bankcruptcy of TH Lee portfolio company Refco, the difficulties with labor unions at Texas Pacific Group portfolio company Gate Gourmet, and the employee protests and nationalist movements sparked by Butler Capital Partners’ offer to acquire France’s National Corsican-Mediterranean – have shown that the industry is not immune to the impact of negative perception. Private equity GPs are increasingly realizing that failure to install the appropriate PR defense mechanisms could allow crises not only to impede future investment activities, but also to inflictmeasurable losses in value.
?Crises can impact fundraising, and they can impact a firm’s ability to carry out a transaction,? says an in-house communications advisor at a private equity firm. ?Someone might notwant to invest with you or sell you a company if they don’t find you to be a reputable organization – whether it’s true or not. Much of it is about perception.?
To the extent that the private equity asset class has become subject to greater public scrutiny, not only are there greater ramifications to being caught in a negative public perception crisis, but the range of crises that GPs might encounter has widened as well.?As private equity becomes more public – particularly with the increasing involvement of government and individual investors in this asset class – whatconstitutes a crisis is broader than before,?says Michael Weiser, a private equity public relations expert and chairman of The Weiser Group, a New York-headquartered communications firm.
Consequently, the best approach to addressing these issues will vary by GP, as will the utility of planning for crises. To this end, Patrick Dunne, group director of communications at international private equity and venture firm 3iin London, says itis useful to assess ?the value you protect and the value you create? when determining the usefulness of having a crisis management strategy on hand.
THREAT OR OPPORTUNITY
From a corporate standpoint, what a communications crisis boils down to is an event that ?disrupts the normal flow of business,? according to experts in the field. These disruptions may occur under a variety of circumstances, but key triggers include ?loss of money – as in the case of TH Lee and Refco – or some sort of impropriety or ethical challenge,? says an in-house communications advisor who asked to remain anonymous.
These problematic situations most often affect private equity entities at the GP, portfolio, and/or industry level.
Many times, a public relations crisis may ?stem from a lack of understanding over what private equity is, what it can do, and what value itcan bring a company,?says an external communications consultant.?Sometimes, it involves short-term pain for long-term gain. Explaining thatcan be a difficultchallenge for private equity firms.?
However, Weiser suggests that these challenges may also present GPs with opportunities to test their mettle, and he recommends GPs be mindful that ?a crisis becomes either a brand opportunity or a brand threat, depending on how you handle it.?
The upside of crisis situations is that well managed public perception liabilities can demonstrate the competence and trustworthiness of a GP, not only to their LPs but to the general public. ?Communication is very important because it can influence the relationships that you have, so it can be really critical to success,?according to 3i’s Dunne.
?A lot of [private equity] firms don’t expect to see their names out there [in the public eye] and tend to operate under the radar screen, mostly because they don’t have marketing reasons to be out there,? observes a public relations advisor.?When they have to be reactive to a situation, they will get out there and involved with the press, but public relations might not be a big focus from a proactive standpoint.?
In addition, striking the right balance between managing communications and managing time and resources often presents a challenge to GPs.?Many firms are less constrained by cost than by the time required of public relations,? according to the source.?If you become involved in doing a lotof communications, it can become phenomenally time consuming.?
However, as private equity and venture capital GPs increasingly realize the potential impact of public opinion and the media on investment activities, more firms are taking steps to shield themselves from undesired outcomes in the event of a communications crisis by setting up at least some sort of contingency plan to deal with these situations. ?The reality will look slightly different from the plan, but the process of preparing the plan and practicing it is a worthwhile process,? says Dunne. And while the best structure and allocation of resources to a crisis management strategy will depend on the size and nature of a GP, as a general rule, crisis management is best approached as any other business decision that the firm might make, according to experts in the field.
The key consideration in crisis management strategy from a ?business?standpoint is how much time and effort to allocate to the function. Most of the larger buyout houses – such as Warburg Pincus, The Carlyle Group, and 3i, among others – tend to have more resources available for retaining a set of in-house specialists with whom to rely on matters related to investor and public relations communications.
For example, 3i’s communications requirements shifted upon the firm’s IPO in 1994 and continued to evolve as 3i underwent internationalization, says Dunne. ?Being a FTSE 100 company with a global business employing 750 people worldwide, we find that very active communications – both externally and internally – is helpful to the business,?he says.
Dunne, who has been at his post as 3i’s group director of communications since February 2003, says that his position – although at times with a different title attached – has existed for many years, and in addition to other communications functions at 3i, his responsibilities include the area of crisis communications.
In addition to the mega-buyout firms, an increasing number of GPs are also becoming more and more aware of the usefulness of retaining staff dedicated specifically to communications. Firms with a smaller scale of operations but engaging in a large number of deals are also likely to have ready access to a public relations team – be it in-house or external counsel – which can then be employed in crises that may arise. ?It’s expected these days that people will have inhouse counsel or at least some communications staff on hand,?says a source who handles public relations for private equity firms.
This observation is substantiated by data collected on the industry. Notable within the National Venture Capital Association has been the formation of a group of private equity Marcom (?marketing and communications?) professionals. Over half of these 55 Marcom professionals work at firms managing mid-sized funds – between $100 million and $500 million in size – and these types of professionals are ?beginning to be adopted at firms of all sizes,? according to a recent NVCA survey of this group.
However prepared a GP firm is for a PR crisis, when a potentially compromising situation does arise, it’s easy to feel taken by surprise. However, there are certain mitigating structures, preparations and actions that the firm can engage in to alleviate the fallout.
As is the case in most corporate crises, virtually every action taken by the private equity firm and every word spoken in public by its representatives will be scrutinized, if not by the media, then almost always by LPs, peers, and other related entities. Therefore, when it comes to assigning a team to handle crisis situations thatmay arise, it is important to have the right team in place, says Dunne. The most effective people in crisis situations tend to be calm, thoughtful, good at prioritizing, articulate and action-oriented, according to Dunne, who adds that it is also important to select people ?with credibility within and outside of the organization.?
To deal with increased public scrutiny, the firm will need to develop a plan to guide its communications with LPs and the public.?The plan should state: this is the situation and this is what we will do about it,?says Jennifer Jones, founder of Woodside, California-based Jennifer Jones Consulting, a marketing advisory firm with a number of private equity clients. If advice from a crisis management expertis sought,?the partners need to be willing to live by the advice,?she adds.
The initial stage of implementing the plan will involve doing due diligence on the situation and making sure that the information in hand is accurate before proceeding with announcements to LPs and the public.
Firms may then tailor their investor relations communications based on the preferences of their LPs – a community that has the most right to know about crisis situations.?In some cases, when there is a controversial deal or situation, it’s actually prudent for a GP to wait until they have all the facts and take the time to weigh in on the situation with their own internal team and discuss it with external advisors. We would like them to make us aware of the situation, but they don’t have to commit to saying it’s already been solved,? says Chuck Flynn, managing director and head of Bregal Investment’s fund of funds operations in New York, regarding the perspective of LPs.?They can just make us aware of the situation, even if there isn’t a lot of content behind the update.?
When the time arrives to explain and update the situation to the public – which may require adopting a different approach than when communicating with LPs, the recommendation of both in-house and external crisis management advisors to private equity firms is to tell the truth and resist the urge to ignore or hide from the situation.
?In every crisis communications challenge I faced in my operating career, invariably the bestway to douse a fire has been to take responsibility and stick to the facts,? says Phil Ressler, vice president at Clearstone Venture Partners in Menlo Park.
This was the approach taken by the National Venture Capital Association when the US venture industry came under fire in 2000 after the bursting of the dotcom bubble. According to NVCA’s director of public affairs, Emily Mendell, the association put forth statements admitting that the VCs had learned a painful lesson, and then provided facts about the industry’s performance. To keep a negative story from perpetuating itself,?it’s best to talk about what happened; ?no comment? does not tend to work well,? says Mendell.
?In the end, those who hide from the issues are going to pay a much higher price than those who confront issues early on,? says Michael Weiser. ?The price will be paid in terms of a firm’s reputation, which will impact its ability to attract funding, key people, and entrepreneurs.?
Weiser adds that the backlash against attempts to skirt the issue tends to be stronger than GPs would expect.?Whatis uniform to all crises is that the lack of realism, the denial and sometimes the subsequent attempts to cover up are usually the most damaging things.?Investors and constituents are likely to realize that the GP cannot control all circumstances.?Things will happen,?says Weiser.?The key issue is: How well is the GP perceived as resolving the problem??
Weiser points out that a potential breeding ground for public perception crises is the area of personnel management. Firms often mishandle personnel issues, he says, adding that the departure of key people from a GP can erode confidence in the firm’s ability to continue its activities. For this type of situation, Weiser recommends firms make certain that LPs and other key constituents are familiar with professionals atall levels of the organization.? The advantage to doing so is thatothers are visible candidates to take the place of the departing person,?he says.?If the perception is that there are only one or two key people, and then one of them leaves, it becomes difficult to close ranks.?
When personnel do leave the firm, ?acknowledge the hit and move on,?recommends Weiser.?Try not to be engaged in a lot of back-biting, and avoid fueling concern by not acknowledging the importance of [the departure].?
THE PORTFOLIO EXCEPTION
A possible exception to the rule of actively courting the public is when a crisis involves a portfolio company. If possible, itis usually best to let the portfolio company’s management deal with these issues and for the GP to advise from a less prominent position, according to a number of sources.?If the management is competent, let management handle the situation, and stick to advising behind the scenes,? says a communications expert at a private equity firm.?And if the portfolio company doesn’t have in-house public relations counsel, it should hire externally. To have the private equity firm’s PR person serve as spokesperson for the portfolio company by definition drags the owner into it, which you should avoid if you can.?
Keeping separate counsel for the private equity firm and the portfolio company also forestalls potential conflicts of interest. According to a public relations advisor, ?It is difficult to be paid by both the sponsor and the portfolio companies and totally avoid conflicts if the interests of the portfolio company and the interests of the private equity firm may diverge, such as when the private equity firm decides to replace managementor divest the company.?
Another determinant of how best to respond to a crisis is the strength of rapport that the firm has built with the press, according to experts.?In most cases, crises are handled well because the firm already has in place a communication program with key audiences, such as members of the press,? says Jones.
Jones recalls a crisis involving the unexpected death of a managing partner at a venture capital firm.?The press wanted to come out with the story the morning after the occurrence, but not all the facts were clear – and there was a family involved – so we asked the press not to jump the gun and put subjective thoughts in the reports before all details had come through,? she recounts. ?Because of the previously developed relationship with the press, we were able to get them to hold off on reporting the story until the facts became available.?
In this crisis, some in the market believed that with the death of the partner, the firm would ?go belly up,?says Jones.?People immediately thought that the firm couldn’t continue its activities, but thatwas a perception, not a fact.?Jones pushed the partners of the firm to ?stay out there and talk to people in the VC ecosystem,?and the firm ultimately recovered from both the perception and personnel crises, she says.
General partners should also consider discussing confidential matters with the press on an off-the-record basis, suggest some experts, rather than refusing to comment at all.?A lot of people in the venture business are not used to doing that,? observes Jennifer Jones.?You’ve justgot to work with [the press] – in many cases the story will get out anyway, and you make a mistake if you don’t know what information they are working from.?
Although adopting a forthcoming attitude is typically the most effective way of approaching public perception crises, there are instances where it may be appropriate for GPs to take on a ?no comment?stance in a strategic way. Commenting on how to react to unfair accusations, an in-house public relations expert at a buyout firm says, ?One thing a lot of people underestimate is the power of saying nothing. The conventional wisdom among most public relations people is that engaging early on is the good thing to do. However, saying nothing and letting third parties defend the target of attention is usually a more effective route. That way, companies don’t look as self-serving when they are laying low.?
This communications pro points to the recent controversy in Germany where US and UK private equity firms were branded as ?locusts? that fed off the local economy. The accused firms have kept a lower profile and refrained from making a public stand, and as a result, the disquiet over the issue has lessened.
Overall, there is growing awareness among private equity firms of the importance of adopting crisis management and general communications programs.?I definitely sense that the bigger firms get, and the more private equity firms are in the news as the asset class continues to gain more attention, it becomes more important to communicate,? comments an in-house private equity PR advisor. ?It becomes even more important if you are planning to go public with a company.?
However, such programs should be constructed with practicality in mind. ?Private equity firms with large portfolios could have dozens of companies in dozens of industries. To try to do crisis planning for each case would be overwhelming,?says an external PR consultant.?What private equity firms need to do is pick their spots and decide how much time they are going to spend on public relations versus other business activities.?
Crisis case studies
Major private equity firms have recently encountered publicity snafus. Here’s what happened, what the damage could be, and how the GPs have played it thus far.
TH Lee/Refco – In October, Refco, a publicly traded derivatives broker and Thomas H. Lee Partners portfolio company, revealed that its CEO, Phillip Bennett, had managed to hide a $430 million loan from his shareholders, underwriters, auditors and private equity backers. The company has since plunged into bankruptcy. The scandal has cost TH Lee its investment in Refco (although the firm did manage to extract dividends from the company pre-IPO) and created doubt among some in the finance world as to how thoroughly the firm conducted its due diligence prior to investing. Immediately following the apparent fraud revelations, TH Lee co-president Scott Schoen spoke with the press, saying he and his firm had no knowledge of the illicit accounting, and called the news ?disappointing.? The firm’s partners then cooperated in a Wall Street Journal article detailing their discovery of Bennett’s loan.
Texas Pacific/Gate Gourmet – In August, Gate Gourmet, a loss-making air catering company owned by TPG, faced a public relations meltdown in the UK after being accused in the media of deliberately escalating an industrial dispute with parts of its workforce and their trade union representatives. The dispute led to Gate Gourmet workers staging an unballoted strike, which soon affected British Airways, the company’s largest customer. As a result, Heathrow Airport was thrown into chaos, leaving thousands of travelers stranded for days. Although most of the media’s hostile stance focused on the role of management, TPG was depicted as a group of ruthless capitalists, scheming in the background to protect their investment at the expense of allegedly innocent workers.
Throughout the dispute, TPG did not enter the debate, deferring instead to Gate Gourmet to handle all communications. The caterer’s efforts to stem the negative publicity coming its way included direct approaches to journalists and editors which it felt had misrepresented the course of events; a stream of news releases on the status of negotiations with the unions;continuous reiteration of the illegality of the industrial action staged by Gate Gourmet personnel during the crisis; telephone hotlines open to journalists and the setting up of a website, www.gategourmetlondon.com, to document the company’s version of events. Eventually, Gate Gourmet and the unions came to an understanding, allowing the company to sign a new contractwith British Airways in October.
Butler Capital/National Corsican – Mediterranean – In late September, French private equity investor Butler Capital Partners’ attempt to acquire near-bankrupt National Corsican-Mediterranean was hindered by protesting employees. Sparked by fears that the sale of French government-owned SNCM would result in the loss of 400 jobs, roughly 500 employees engaged in a 23 day strike, which culminated in the hijacking of a company ship by protesting workers. Ultimately, the unrest was quelled by pressure from the employees’ labor unions, according to press reports. Butler Capital president and founder, Walter Butler, was direct with the press, saying that turning around distressed companies may involve closing factories and shrinking the employee base; consequently, ?part of your skill set [in turnaround deals] is your relationship with the unions,?Butler said to The New York Timesin early October, adding that ?We must have an agreement with the unions. That is our philosophy.?
PR PROBLEMS:PRE-, MID-, AND POST- CRISIS CONSIDERATIONS
- ? Create a crisis communications plan in preparation for certain types of crises by assigning key roles and setting procedures in place
- ? Be aware of who to contact for counsel in the event of a crisis
- ? Develop familiarity with key members of the press
- ? Align internal and external communications processes
Reacting to a crisis:
- ? Consult in-house or external PR advisor immediately
- ? Execute the prepared plan
- ? Determine the parties affected by the crisis, e.g. portfolio company; GPs; LPs
- ? Gather facts and line up allies in the appropriate areas to ?provide balance to the shouting,? advises an external PR consultant to private equity firms
- ? Reserve commentuntil all facts have been gathered
- ? Be honest with not only the public and your investors, but yourself as well – delusion is very seductive, but only in the short term, and it is damaging in the long term
- ? Take corrective steps to ensure incident does not reoccur in the future
- ? Give evidence of efforts and intentions to follow through on these corrective steps