PE firms lag behind VCs in adopting social media

Visit the bathrooms at The Riverside Company offices in Hong Kong, Japan or any other location across the world and what one sees is an account of the private equity firm's failed deals on the wall. Known as Riverside's "lessons from the loo," the list of deals gone wrong serves as a constant reminder of where the firm has gone wrong and wants to remind itself not to do again.

This overtly transparent policy - the failures are there to be seen by any investors who visit Riverside's offices, after all - is merely part and parcel of the strategy promulgated by Riverside's co-CEOs over the past 24 years to be open and accountable. A more recent addition to this culture is the development of a social media campaign, making Riverside one of the few PE firms with an outreach in this area. The firm got involved in social media three years ago, largely out of curiosity and a desire to take advantage of being one of the first investors in this space.

So, if social media is one way for a firm to display its own transparency, have the majority of PE firms steered clear from the medium because they want to keep holding their cards close to their chest?

Graham Hearns, Riverside's managing director of global marketing and communications, believes so. "There's been a low adoption rate because the private equity industry has still been clinging on to that word ‘private' and social media is anything but private," he tells AVCJ.

Opening doors

In their eagerness to maintain their privacy and answer to no-one but LPs, many private equity firms could be missing out on a chance to boost their business activities through a resource that is - unlike most others in this industry - free.

One area in which industry participants foresee big potential for social media is in the origination of new deals. Indeed, several deals have already come to Riverside's attention which it wouldn't have seen without a social media presence. Though none of these transactions have closed, its social media channels - LinkedIn, Twitter and YouTube - have provided the firm with the opportunity to maintain relationships with its existing brokers and intermediaries.

"It's given us a leg-up with certain deals where we've been able to do some homework and find out who may be working at a particular company," points out Hearns.

On the fundraising front, social media appears to have a more limited reach, not least because there are very few LPs who use forums such as Twitter. Riverside admits that being active online hasn't opened the firm up to new investors, but it is confident that new LPs have been able to use resources such as its YouTube channel to conduct extra due diligence.

FF Venture Capital, co-managed by David Teten, author of "The Virtual Handshake: Opening Doors and Closing Deals Online," has had more luck, however, as one of the firm's investors found them online and reached out to them. Teten, who is also a mentor at start-up network Founder Institute in New York and Singapore, is confident that LP-GP relationships will start this way more often in the future.

"Just as it's very inefficient to go to a party and hope to meet a spouse, it's very inefficient to hope to meet a banker who specializes in financing companies like yours," he says. "If you could go to a place where you'd only meet the people who are most pertinent to you, you'd save a lot of time. These technologies make it more efficient to search for people who meet your criteria without being restricted by geography."

The potential benefits are clear, then, but with seemingly limitless forms of social media available, it can be difficult for firms to know which mediums to adopt and how best to use them. One commentator on this subject who swears by LinkedIn is Matt Craig-Greene, a speaker on private equity and venture capital-related topics for UK-based merchant bank Templewood, who runs the largest PE and VC fundraising group on LinkedIn.

"My group on LinkedIn has grown to a membership of 13,000 since I set it up a couple of years ago," he says. "This tells me that there is significant interest in the industry to interact in this way." Craig-Greene recognizes though that while effective for discussing certain subjects, the medium is ineffectual for others: "LinkedIn is a good way to find interesting content and people but, like any attempt to disintermediate the investment process, it is a lousy way to originate deals."

Riverside also speaks highly of LinkedIn, citing it as the social media tool that has provided the biggest benefit and will continue to do so in the long-term. One of the ways the firm uses the site is to see whether anybody among its global team knows a particular contact it wants to meet to obtain insight into a deal, for example. A number of introductions have been made in this way.

Riverside has also created several private groups for the CEOs, CFOs, outside directors and IT directors of its global portfolio companies to enable members to share examples of best practice. Additionally, the firm will often advertise events via its various groups. "We've had a much stronger response through posting these types of invitations through social media than if we were to send a forced email blast or even a hard-copy campaign to invite someone out for an evening," says Hearn.

While YouTube and Twitter are used to a slightly lesser extent, they too play an important role in raising the profile of the Riverside brand. The firm uploads features to the popular video-sharing showing its team in action in different parts of the world, allowing LPs and investee companies a glimpse of how it does business.

Twitter comes in handy when it wants to publicize news or events that don't necessarily merit a dedicated press release. One example of the latter is when Conor Sports Flooring, a Riverside-backed company, provided the basketball court flooring for a college championship game several weeks ago.

Computer says no

Of course, while Riverside is one of few private equity firms to have displayed any real mastery of social media - MCM Capital Partners is another example - venture capital firms have embraced the form of communication to the extent that 10-15% of them are thought to blog, at least in the US.

The main reason for their larger appetite, believes Craig-Greene, is the very nature of the deals they're doing. "It is expected that a VC, particularly one investing in consumer internet deals, will be on Twitter at the very least," he says. "This is not typically the case for private equity. If you're doing large buyouts in continental Europe, people don't really expect you to know what's going on Twitter."

In Asia, however, buyouts aren't the dominating transaction class, however, and while the majority of investments in social media are still made by venture capitalists, a number of private equity firms have also backed (mainly Chinese) businesses in this sphere.

Facebook clone Renren.com, for example, counted General Atlantic among its backers, Brookside Capital Partners holds a stake in Beijing-based online video company Youku, and Ushi, the Chinese LinkedIn equivalent, was founded by former PE executive Dominic Penaloza. If we extrapolate the logic that social media investors should know a thing or two about the sector they're investing in, it's conceivable that private equity firms in Asia who invest in these businesses could start to engage in social media quicker than their buyout-favoring counterparts in Europe and the US.

What has to be remembered however is that social media isn't an aspect of firms which is going to improve in isolation; if a firm doesn't have a strong desire or ability to communicate more widely then there seems little sense in it exploring these technologies.

"Social media is just a basket of additional communications channels, and communication is not something the industry has ever done that well," Craig-Greene says. "Beyond research and the odd piece of thought leadership and press releases to announce deals and new hires, I don't think PE houses really engage."

As social media is just an extension of how a firm uses marketing, private equity has a long way to go before it embraces the concept to the same extent as other industries.

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• Topics
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• The Riverside Company