Losing your chutzpah, preserving your brand

For the most part GPs know and understand the advantages of a recognizable brand name. Your Carlyle, Blackstone and KKRs of the world enjoy increased visibility with investors, dealmakers and job seekers when marketing funds, sourcing deals and recruiting talent. But less known and understood are some of the more hidden psychological elements that can accompany a strong market reputation. 
 
According to fresh research presented at the Oxford Private Equity Forum last Tuesday, it appears that GPs show no signs of producing higher returns as they age. Moreover their volatility of returns also decreases over time – in essence they become predictable. Could the second finding help explain the first? 

One thing for certain is that a private equity firm able to deliver year-in and year-out as others fall is steadily building a brand name for itself. This in turn provides the “survivor” firm with the marketing advantages laid out above. But that’s no reason to assume the firm’s original risk appetite will be retained as its brand image steadily accrues goodwill within the industry.   

 
This could be because GPs become more cautious as they get older, wanting to avoid deals that could tarnish the reputation they have built over decades. Building a brand synonymous with success takes years of not only good performance but, perhaps more importantly, also the ability to avoid failure.
 
It could be argued that firms, perhaps subconsciously, take their foot off the gas in order to protect this reputation. Whether for good or bad, both LPs and GPs should be aware of this psychological factor when agreeing return targets. 
 
For instance, LPs may be getting a very different proposition from longer-established GPs than they realized. It is possible that GPs in a bid to protect the franchise, and future fundraising efforts, are less concerned with hitting home runs than they are with avoiding a strike-out, despite promising investors the firm will still swing for the fences. 
 
But with firms being scrutinized over long-term performance more than ever amid frothy fundraising conditions, that degree of caution could be a good thing for LPs. Indeed the ability to generate stable returns over many economic cycles, at the cost of a few blockbuster deals, may just be something for GPs to tout in their experienced age.