Amid current economic challenges, where GPs are grappling to secure capital commitments for their funds, selling the investment opportunity is a fine art. Kimberly Romaine, a 20-year veteran of the PE communications scene, breaks down common marketing mistakes, how to stand out to LPs in a challenging market and where placement agents fit into it all.
“Traps some GPs can fall into is thinking that one home run – one amazing, outsized return – is going to win them a fund.” Kimberly Romaine should know: after a decade in the industry as an analyst, a researcher and an editor, Romaine founded Private Equity Communications ten years ago, a specialist agency working with GPs to help communicate their successes. She describes what she does as filling the communications gap that exists between GPs capable of making strong returns and prospective investments and LPs looking for standout reasons to partner – beyond bog-standard beta gained through financial engineering. She calls this the “stories behind the numbers”, and believes it is the difference between a successful fund and a mediocre one.
Romaine argues that in today’s market, LPs and business owners are looking for more than just value creation through leverage or multiple arbitrage. She says to impress potential investors and sellers, GPs need to show more than a presentation about previous success stories, they need to present a proven history of value creation strategies which can be repeated.
“It’s what limited partners want to hear and it’s what business owners want to hear, because they don’t just want your money. Owners are after capital and expertise, they want to be able to draw on your experience to support their growth,” she says.
And investors are also looking for more than just numbers: they want to know how those numbers are derived. Romaine says that LPs want to see that funds have certain skills in-house that can help management teams to grow their business, such as helping to digitally enhance their offering, or support expanding their footprint, to pursue M&A, to create a robust ESG framework.
Romaine says selling the story is about appearing human. “Because everybody has numbers, and you’re not going to get through the first phase, first gate, if you don’t pass the numbers test. But then after that, it goes back to telling the stories behind the numbers and doing it in a way that people can understand.”
Romaine has also noticed a shift in how ESG plays a role in value creation over the last few years. What began as a regulatory checklist is now something that people appreciate can drive real value in a business. “So from a private equity firm’s point of view, you are going to get a better exit multiple when you go to sell the company if that company has a robust ESG framework in place.”
ESG can provide this value creation in a number of ways. In terms of running the business day-to-day, Romaine says employees increasingly look to align their values with that of the business, and so companies that have neglected sustainability considerations may struggle to attract new talent. “And so it’s not just about rhetoric, it’s actually about how companies will be more valuable, because they will be more future proof, they’ll be better able to attract and retain talent, they will be better able to win clients, because people care more about this now.”
In Romaine’s opinion, one of the biggest mistakes GPs can make is to rely too heavily on one great success story to win them a fund. “What GPs need to understand is that for the most part, LPs will disregard outliers in a track record. So it’s great you achieved a 27 times multiple on something, but luck will have played a role, and it’s unlikely you’ll repeat that,” she says.
Instead, it’s about repeatable value creation strategies and GPs are better off showing how they applied some experience into navigating prior downturns to help a company overcome a tricky time. “I’ve seen LPs ask about the companies that went wrong, and how GPs handled that situation. And that’s because they want to know how private equity firms deal in the face of adversity.”
“I think GPs need to be prepared to talk through their battle wounds, not just the amazing homeruns. And it’s really important now more than ever, in a down market, to show that you have experience in navigating companies through challenging backdrops because that experience is now hugely relevant.”
When it comes to fund documents, many fund managers simply update the numbers and appendices for their next vehicle, but this may no longer be sufficient “Over the last decade, there’s been a shift where LPs are more interested in origination and a lot of GPs put this towards the end. They love to start with the history of the firm, but actually, LPs want to know about the track record and how you’re going to find the next great opportunities to repeat this success with.”
Romaine finished on her view of where placement agents fit into all this and whether they are worth the money put into them. She said that she doesn’t consider them to be one homogenous group; that some are worth every penny and others get a bad reputation for a reason. She says one indication of a good agent is one that does for a lot for you between fundraises as well as during active road showing.
“I you don’t feel you’ve got the manpower in house to manage what is an enormous process, then you need to mandate an agent who will take on that role of project manager and communications between fund raises. I think project management is necessary, whether or not it’s an agent is a question that each firm needs to answer.”