By Charlyn Lusk
Private equity investors are watching this year’s deal environment cautiously and should be prepared to carefully consider their communications strategy as they operate. With market volatility expected to continue playing out through 2023, and with high interest rates making dealmakers skittish about the additional adverse impact to the deal environment later this year, PE firms need to be especially conscious about the messaging they want to put forth to the market and current LPs.
Investors may be understandably hesitant to put forth new capital, which may frustrate firms looking to fundraise. Moreover, an enormous amount of dry powder that still needs to be deployed by the PE community may be slowed by choppy market conditions and the overhang of recession fears.
Buyout shops must think carefully about communicating and explaining their investment thesis to stakeholders. What types of companies do they wish to back in terms of size, sector focus and stage of life? Are they focused on building lower middle market companies into industry leaders, taking large companies private via LBOs, helping family-owned businesses enter the next stage of life? Or are they focused on turnaround situations, rebuilding companies after seismic industry shifts or crisis situations? Each PE firm must deliberately weigh and artfully communicate strategic thinking behind capital deployment, building up portfolio companies, sourcing deals, and creating value for investors.
PE firms must also celebrate and display their successes in marketing communications like releases and via proprietary media engagements. These victories may include profitable exits, value-added acquisitions, successful business building and overall execution of the firm’s investment strategy. This will illustrate and display PE’s relevance in the deal community, the wider marketplace and to business leaders looking to tap the private equity industry to grow their companies. Further, buyout shops must display a clear line of sight and strategy around paths to value creation, well-tested methods of sourcing new deals and growing portfolio investments in this unsteady economic climate.
Nor can limited partners be left in the dark. Buyout shops will not be well served if they fail to effectively explain to their investors how they will use capital called, how they will execute on value creation, and what they can expect as a reasonable ROI. Is their PE shop building a company in a mature sector via organic growth or via bolt-ons, increasing risk and holding the company over a longer period? Or instead, is the shop engaging in shorter term, more complicated deal structures? The merits of each approach must be communicated to all stakeholders: employees, investors, portfolio companies and the broader marketplace so that, literally, everyone is on the same page, and in agreement on the strategy.