Marketing in a private equity environment

This is an edited version of the Spencer Stuart CMO Summit held in the US, Summer 2007
 

Private equity firms and their portfolio companies have become a significant force in many industries, consolidating businesses, shifting industry economics and competing for top talent. Indeed, as the influence of private equity has increased, firms and their portfolio companies are attracting leaders from among the ranks of the world’s top business executives

A SPENCER STUART survey of senior-level marketing and general management executives, carried out in 2007, found that 86% of the world’s top business executives who have never worked in a private equity environment would consider a private equity role today.

There may be more opportunities for these senior-level marketers. As the traditional view of private equity firms as solely focused on cost management gives way to a model that is mainly focused on growth, the marketing function is playing a more central role in the success of private equity ventures.

Spencer Stuart brought together a panel of US private equity leaders together with consumer goods marketing leaders to discuss the realities of marketing in a private equity environment. Hosted by Spencer Stuart, Advertising Age magazine and the American Marketing Association, these executives discussed the role of the marketing function in a portfolio company, and the career and leadership considerations for marketing leaders.

Private equity today: the growth imperative

The private equity model of the 1980s and 1990s relied on financial engineering and sharp cost-cutting to create value. In the past several years, however, as investments in private equity have soared and funds face increased competition and higher prices for deals, it has become more difficult to create value in these traditional ways. Today, private equity creates value through profitable revenue growth – by leveraging marketing and innovation, panellists said.

We’re at an all-time high, from my perspective, in terms of the kinds of multiples that lenders are willing to lend times cash flow, so there’s some thin air out there. As a result, the types of company that private equity firms are acquiring now are not the types of company that were necessarily distressed like they were in the 80s. They don’t have the costmanagement issues.’

CMO, Burger King

Growth is the key to valuation these days. The financing is a given. Getting the cost structure right is a given. The only way you’re going to differentiate yourself in the deal process is to acquire a company and be able to finance it – or on the back end, to sell it and make money – is by achieving superior profitable growth. Senior Executive, investment firm

This imperative to profitably grow revenue has implications for marketing, elevating the influence of the marketing function in identifying new opportunities for growth, setting appropriate pricing and effectively managing relationships with the most profitable customers.

I’ve been involved with private equity since 1992 and I can tell you it’s nothing like it was 15 years ago. The importance of marketing and its role in figuring out how the company is going to either evolve the business model or continue to run a business for growth is becoming more and more important. Senior Executive, investment firm

Marketing: friend or foe

With a reputation as hard-nosed cost cutters, private equity, many assume, would take a dim view on spending on marketing, particularly on such initiatives as brand advertising that may be less measurable. But panellists said that – far from putting marketing on the chopping block – the private equity firms they have worked with are more than willing to spend on marketing initiatives that benefit the business.

If anything, private equity owners want to invest in marketing. They are going to cut costs. They’re going to find cost opportunities generally in operations, and they’re going to put that money back into the top-line growth. That’s innovation, technology investment and marketing.

CMO, Travelocity

For senior-level marketers, a private equity role can provide an opportunity to make a significant difference in the business, something that can be more difficult in a large organisation.

The portfolio companies I work with are thirsty for the best practices of industry. The CMOs who are exposed to the practices that are in widespread use today at $20 billion companies, $100 billion companies or $180 billion companies are very much in demand at $100 million, $500 million and $1 billion portfolio companies. I could see us implementing something like the Net Promoter Score, for example, across the 28 companies in our portfolio in the span of two months, and start to get monthly feedback on our ability to track, retain and refer our best customers. The ability to quickly put a new idea into practice makes it a very fun environment in which to work.

COO, investment firm

It is the ability to act quickly and to focus the organisation’s efforts on results that appeals to many senior executives, panellists said. Without the pressure of having to meet quarterly financial targets, portfolio companies are freed to invest in intermediateterm strategies that build towards an ultimate exit, which could include a sale of the business or an initial public offering.

Within private equity, the laser focus that you get on your business is tremendous. With big companies, there are so many other things pulling at you that you can sometimes feel like you are defending your business against many corporate demands. You can lose a little focus. A CMO who is in a private equity environment can concentrate on his long-term strategy and on growth. It can be harder to grow in a public company because a long-term look might be the end of the next quarter. CEO, Honeywell Consumer Products Group

To what extent does the focus on results impact the kind of marketing initiatives portfolio companies pursue? Panellists discussed how their organisations approach spending on advertising. Private equity, they said, does not have an aversion to advertising – even to traditional media channels that may be less measurable – if the value to the business and the brand can be demonstrated.

While private equity has an inherent bias towards the more measurable media, marketers can demonstrate the value of traditional media advertising through the use of more sophisticated econometrics models.

Private equity understands measurable ROI. When we propose spending several million dollars more on distribution channels that are highly measurable, and we can prove that on a variable basis it’s going to be positive, they’re very open to adding money to the spigot, as long as you can show it continuously remains profitable on a variable basis.

CMO, Travelocity

The ‘dark side’ of private equity

Even as private equity has grown as an attractive opportunity for executives, it may not be for everyone. Portfolio companies typically have high levels of debt, requiring constant attention to cash flow, spending levels, debt repayment and financial targets. Portfolio companies often lack the human and financial resources of large, public companies, requiring the leaders of these companies to wear multiple hats.

Finally, despite all the attention private equity receives, not every private equity venture is successful; and a struggling portfolio company can be a very difficult place to be, panellists cautioned.

It is important for you to remember as you are presented with opportunities from private equity, that there aren’t many symposiums that invite average portfolio or private equity managers to speak. That’s because most of them underperform. Not every private equity deal that comes along is a bag of money about to fall off the back of a truck for you. There are a lot of deals out there that disappoint and that don’t deliver the value creation.

CMO, Burger King

In the Spencer Stuart survey, 41% of respondents said the pressure on marketing is greater in private equity firms compared with a public company. Among the reasons executives gave for this view was the ‘results or out’ pressure, the significant debt load and focus on short-term cash flow, and relatively fewer resources. As one respondent put it, ‘You don’t have time to test the market, but you can’t be wrong.’ A struggling or unsuccessful portfolio company can be a function of an inappropriate capital structure on the business. As a result of the debt load, there can be little room for a misstep in product launches, marketing and pricing.

If you make a misstep, you will spend an inordinate amount of time in meetings with bankers explaining what you’re going to do about it. That can be a very serious drain on management time. It also can affect the amount of cash flow that is available to reinvest in the business – in the brand and new products – or to retire debt. It’s not a very fun environment.

MD, private equity firm

Improving your chances

How can marketers considering a senior role at a portfolio company improve their odds of joining a successful venture? Careful due diligence about the portfolio company’s strategy and financial position and the private equity firm are essential, panellists said. First, it is critically important to understand the fundamentals of the deal.

Marketers should strive to understand whether there are structural barriers that would prevent the executive team from being able to operate and grow the business.

Once you understand the inner workings of the capital structure, you should do all of your normal due diligence in terms of a brand’s prospects and ability to grow, and then do your own arithmetic around the valuation to understand what your equity position could potentially be worth.

CMO, Burger King

And while it may not come naturally, marketers need to be fluent in the vocabulary of private equity and how the financial engineering works.

Private equity leaders expect that serious candidates for portfolio company roles will ask questions about how much of the equity is allocated to the management team, as well as the firm’s expectations about the company’s performance. Firms also are looking to align executive compensation with the economics of the owners.

If you are overly concerned about your current compensation or bonus package as opposed to making sure that you’re compensated fairly overall, that’s probably not going to play well.

MD, private equity firm

Wise marketing management leaders also will consider how compensation and incentives for the rest of the organisation are aligned with the performance of the company.

The Travelocity management team made it a point to ensure that key people throughout the organisation had a stake in the company’s success.

How do you motivate companies of 10,000 employees when there’s no longer a stock price to watch? The great thing is we’ve been putting a lot of thought into incentives programmes for not just three or ten executives, but several hundred executives. If you think about it, in a consumer company, every employee matters.

CMO, Travelocity

The onus is on the executive team to push for a plan that provides incentives broadly. ‘I don’t think you’re going to find private equity firms proactively trying to look for a democratic distribution of stock’ was a widely endorsed view.

Beyond compensation, marketers should consider whether they believe their work style and preferences are a good match for the culture and style of private equity.

Successful marketers in private equity environments are the people who can deliver results through their marketing. They’re confident that as they wake up every day, no matter what business they’re thrown in, they can drive demand, they can drive market share, they can drive price and they can effectively make the decisions about the marketing spend.

COO, investment firm

Conclusions

Despite the risks and unique pressures, executives with private equity portfolio companies overwhelmingly indicated that they would join another portfolio company in the future; 86% of respondents to our survey of marketing executives said they were ‘likely’ or ‘very likely’ to join a private equity backed company in the future, citing the entrepreneurial opportunity and the ability to make a real difference in the company’s success.

While private equity represents an attractive opportunity for many senior marketing leaders, marketing executives considering a portfolio company role should understand the financial structure of the deal, the opportunity for growth and whether they are well suited for the challenges of private equity.

About Spencer Stuart

Spencer Stuart is one of the world’s leading executive search firms. It is the advisor of choice among top companies seeking guidance and counsel on senior marketing leadership needs. Clients include FTSE Eurofirst 300, private equity and pre-IPO companies across a broad range of industries. For further information, please contact Jonathan Harper or Frank Birkel, co-leaders of the European Marketing Officer Practice.