PE & PR: A good citizen

David Rubenstein selling lemonade, Bill Conway working in call center and Daniel D'Aniello serving up donuts: these were the "what-might-have-been" snapshots offered by The Carlyle Group's founders in their 2011 Christmas video.

It was entertaining - private equity jargon reeled off to the bemusement of the man or woman in the street - but it had a secondary purpose: reminding viewers that these industry titans are ordinary guys trying to build extraordinary businesses.

KKR has also engaged in visual storytelling, albeit less seasonal and more serious. Its website features a three-minute video produced by the Private Equity Growth Capital Council earlier this year in which KKR professionals demonstrate "value-add in action" at portfolio company Rockwood Holdings. The professionals conduct on-site analysis at the US-based chemical company and the screen ultimately cuts to Rockwood's CEO, who says, "The private equity partner has been great for us."

Both KKR and Carlyle are now listed companies so they must devote more time and resources to profile management. Yet in the last 12 months they and other private equity firms have come under even closer public scrutiny. As soon as Mitt Romney launched his bid for the Republican presidential nomination political rivals began devising ways to milk the industry's intermittent failures and cutthroat reputation for all it was worth.

The image of PE in Europe is little better, with politicians in Germany and the UK longstanding critics of the perceived damage created by leverage buyouts. Almost half of LPs interviewed for the latest edition of Coller Capital's global private equity barometer consider the general reputation of PE as bad; only one in 10 said the asset class is seen as a good thing - dropping to one in 20 among European investors.

"Private equity is certainly a nice target for criticism and industry participants haven't seen brand building as particularly important while it's actually very necessary," Markus Ableitinger, managing director of Asia investment management at Capital Dynamics, tells AVCJ. "We are certainly aware of whether or not a private equity house has a positive brand image because these are usually successful firms that aren't shy about having their names mentioned in public."

While it is clear that private equity needs to improve its public profile in the West, the asset class is considerably less demonized in Asia, where transactions have traditionally focused on growth capital rather than leveraged buyouts. And then in some less developed countries, private equity is simply unknown.

"The biggest challenge concerning PE's public image is the lack of awareness of the asset class itself. As such, many potential portfolio companies don't even think about it as a vehicle for capital," says Steven Okun, director of public affairs of KKR Asia Pacific. "This provides an opportunity for us to create a full picture - not something you can find in the US where everyone already has an image of private equity in one way or another."

Going mainstream

Although Asia is still a relatively young player in global private equity, it is edging nearer to the mainstream, at which point Asian governments and top-tier domestic financial institutions will pay more attention to it. A broader public profile driven by media coverage and increased regulation will inevitably follow.

Certain government agencies in the region are already trying to promote the asset class, the sophistication of their efforts dependent on respective knowledge and experience. China's National Social Security Fund announced in September that it had committed RMB22.6 billion ($3.6 billion) to 16 venture capital and private equity funds to enhance investment returns; a Senate enquiry in Australia also concluded that private equity is good for the economy; Korea and Singapore - both aggressive technological innovators - are encouraging investment into start-ups through venture capital funds.

"The speed at which PE has gone from obscurity to household name in China surprised everyone," says Yichen Zhang, CEO of CITIC Capital. "The asset class is probably better known in China than in the US. And it's generally a positive view: if you ask the top college graduates what they want to be, it's still investment banking and private equity. A lot of the private equity executives in China have almost rock-star status."

Following the lead of their Western counterparts, large financial institutions in Asia are transforming into multi-strategy asset managers in order to appeal to a broader base of investors. China Life, for example, has won approval to launch a subsidiary to invest in private equity, while domestic brokerages China International Capital Corporation and CITIC Securities appear to be moving into new asset classes as fast as the regulations will allow.

In India, private equity subsidiaries have been established by local financial services giants such as Infrastructure Leasing & Financial Services (IL&FS), Infrastructure Development Finance Company (IDFC) and ICICI Bank. Feeding into the general investment enthusiasm, most of the country's business newspapers now have a specific private equity beat intended to inform and educate the public about the asset class.

"Five years ago, there was very little media coverage concerning private equity and people did not fully comprehend the industry or recognize anyone working in it," ArchanaHingorani, CEO of IL&FS Investment Managers, says. "But today, in stark contrast, PE-related news and transactions dominate the headlines."

The emergence of private equity in the public domain demands a response from industry participants. Ignore the issue and the void in the news flow will soon be filled by uninformed, perhaps overtly negative, coverage; be proactive and there is the opportunity to influence the public view. It is especially important when approaching potential investee companies - whose management may not be too familiar with the asset class - in markets where there are competing sources of capital.

This explains why the likes of KKR and Carlyle are employing more public relations executives in local markets. Even some local GPs that have yet to spend large amounts on media campaigns are beginning to take active roles in the media and at industry events.

"As we are better known, we are more mindful of our public profile than before," John Zhao, CEO of Hony Capital, tells AVCJ. "But we have always been very careful. Even when we were nobody, we were serious about building and protecting our reputation, especially in emerging markets like China."

Adding value

A positive brand, however, doesn't come simply out of words. A private equity player can only publicize its success if it is genuinely bringing value to investors and portfolio companies. In this context, first-hand accounts from entrepreneurs who have received private equity funding and expertise, and benefited from the experience, are worth their weight in gold. Word spreads throughout their business networks and suddenly other entrepreneurs are more willing to listen to proposals.

In order to draw more attention to its value-add strategy, KKR teamed up with the Emerging Markets Private Equity Association (EMPEA) to produce in-depth articles on the role of private equity in two of its portfolio companies.

First, Jiuqing Deng, chairman of Modern Dairy, emphasizes KKR as a true partner that "works alongside us at every stage of Modern Dairy's development."ThenYucheng Lin, CEO of UEL, explains how he was able to "leverage KKR's global resources, extensive operational and financial expertise and take advantage of their China team's local experience and track record of success."

"To get the message out effectively, it is better not to talk about yourself, but to have others providing testimonials. This generates greater credibility for the work you have done together," says KKR's Okun.

The Australian Private Equity and Venture Capital Association takes a similar approach in its media outreach efforts. Roundtable discussions are arranged featuring a private equity executive and the CEO of a portfolio company. The CEO takes the lead, explaining why he chose this particular PE partner and what has been gained from the experience.

International angle

For foreign private equity firms operating in Asia, perhaps the most significant element of value-add is access to their global networks. In practical terms, this might involve identifying new customers and suppliers, making introductions to potential development partners, or bringing in executives who have faced and overcome similar business challenges in other markets.

"When private equity players talk about branding in Asia, they increasingly understand that companies in the region don't lack money but are clamoring for access to international markets and industry know-how," says Richard Barton, a specialist in strategic communications. "For any international firm wishing to be a credible player in the region, these are the things they need to demonstrate."

Apart from promoting individual success in supporting portfolio companies as a means of generating new investment opportunities, industry participants would like to see collaborative efforts aimed at shoring up the general reputation of the asset class. There is a sense that private equity in Asia is working to a deadline - act now and consolidate the industry's standing and this could preempt any negative publicity that might otherwise have politicians clamoring for tighter regulation.

"As regulatory authorities globally have been more attentive to potential risks attached to all financial products - plus the fact that they don't really understand private equity - communication is important," David Pierce, CEO of Squadron Capital, tells AVCJ. "This is especially true when private equity in Asia has mainly been about growing small and medium-sized enterprises, which is exactly what policy makers are looking for."

SIDEBAR: Here to stay - Building stable GP platforms

"I attended a conference recently at which people asked the LPs there what they worry about the most. The answer is clearly when their GPs make the front page - unexpectedly and not for good reasons," says Vincent Huang, a partner at global fund-of-funds manager Pantheon. "I am sure there are fund managers that are increasingly aware of this but public image traditionally hasn't been a top priority of most GPs."

Since the global financial crisis, private equity has been forced into a more closely regulated and scrutinized space. LPs are certainly becoming more selective in their investments and there is less tolerance for everything from bad returns to bad image. The rush to invest in China and India funds has been replaced by caution. There is no more easy money for first-time funds. Alignment of interest, sustainable business models and stable teams are high priorities.

Some GPs are certainly aware of that. Hony Capital's CEO John Zhao, for example, tells AVCJ that, from the outset, he was focused on "building an institution that would last forever."

Simon Pillar, co-founder of Pacific Equity Partners (PEP), adds that his company has also been conscious of the need to building a long-lasting franchise rather than a GP that disbands after just one or two funds.

"The firm's name does not reflect the founders and we always set out to establish a brand that doesn't rely on any one or small group of individuals," Pillar explains. "We have over the years institutionalized what we do. We hope this means we have learnt from mistakes and improved the way we do business."

GPs that exude stability and longevity are a source of comfort for LPs. However, Markus Ableitinger, head of investment management for Asia at Capital Dynamics, argues that a strong brand doesn't necessarily mean a private equity firm will stay in business for 20 years. Ultimately, GPs are judged on their track records.

"There is a saying at Sequoia Capital: ‘You're only as good as your next investment,'" Ableitinger says. "As tough as it may sound, a business model is only as good as the last deal. When you screw up 2-3 deals you are in danger, regardless of the status of your brand or the public or industry awareness of your company."

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• Topics
• Regulation
• GPs
• Performance
• Advisory
• Portfolio management
• GPs
• regulation
• KKR
• The Carlyle Group
• Pacific Equity Partners
• IL&FS Investment Managers