Private Equity’s License to Operate Is Under Attack

Private equity’s license to operate is once again under attack, and this time the critics include regulators who have the power to fundamentally change private equity’s model by threatening to curtail firms’ ability to acquire assets being divested by companies and factoring how private equity acquisitions might degrade the lives of ordinary Americans into their antitrust enforcement decisions. What’s more, these criticisms are coming at an important moment – amid shifting investor sentiment, growing bipartisan angst and a worsening economy. And private equity criticisms are crossing party lines. Efforts this past summer to change the carried-interest tax provision generated bipartisan support.

 

At the same time, limited partners previously focused on financial performance also are now increasingly recognizing that employee engagement, job satisfaction and wages and benefits not only are important metrics from a socioeconomic standpoint, but also critical drivers of investment performance.

 

All that, combined with the economy sliding into a possible recession, means there is no better time for sharper messages, and no better time to deliver them through more modern and direct channels.

 

With the stakes rising every day, sponsor firms would be wise to approach their communications differently, both in terms of what they say and where they say it.

 

To be sure, successful private equity investment firms already recognize the power of strategic communications, aware that framing their work in the right way can serve as a competitive advantage for talent recruitment and retention, deal sourcing, value creation, and, when times are tough or uncertain, value preservation.

 

But these days, many firms still are focused primarily on topics like financial performance and returns, investment opportunities and rhetorical commitments to ESG (environmental, social and governance) standards. Given the times we are in and the threats they face, however, private equity firms would be well advised to talk more openly about portfolio company employee compensation and benefits, workplace safety standards and performance, and staffing growth – and, in doing so, positioning the industry as the economic driver that it is.

 

Here’s why: elected and appointed officials in Washington care intimately about jobs, workers (who double as voters) and the economy, and these facts usually resonate with them more than any others. They also increasingly care about socioeconomic issues, and, therefore, private equity should more clearly articulate not just aspirational ESG goals but also actual performance against those goals and how that progress translates into better returns for investors.

 

While traditional media still is an important conduit to reach policymakers and regulators, the message often gets muddled and it is difficult to tell with any degree of precision whether private equity firms are truly influencing their intended audiences. Plus, let’s face it, drama sells, so the traditional media often focuses and lingers on negative storylines rather than on success.

 

By contrast, digital communications channels allow private equity firms to deliver a clear message free from the news media filter and to more easily measure the impact of their messages, whether the messages are resonating and then adjust appropriately.

 

Private equity firms also should embrace more fully in-person discussions with policymakers and regulators while being mindful that the messenger matters as much as the message. Portfolio company employees make excellent representatives for meetings with policymakers, elected officials and third-party allies in Washington and state capitals, putting a human face on what can otherwise seem like an impersonal business. Firms can, for example, showcase leaders who are having an impact in the local communities where they operate, to demonstrate how the industry enables corporate growth and employee advancement.

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