Digital brand building and private equity are two terms that have rarely been mentioned in the same sentence in the past. There are still private equity funds whose website consists only of the logo and a company address. To convince entrepreneurs or LPs of their merits, PE funds prefer to let their investment track record speak for them or make a name for themselves through personal networking or appearances at conferences. The situation is different in other asset classes. Most venture capital funds have been pursuing digital brand-building strategies for some time and are increasingly professionalizing them.
Inspired by VC funds, we at FLEX Capital have invested heavily in digital brand building over the last 12 months. Among other things, this resulted in a new corporate identity, website and content marketing strategy. The decision to invest in brand-building, just like any of our fund investments, also had a tested and well-founded “deal rationale”. I have summarized the key points of this here:
1. distinguishing feature in deal sourcing
To make good deals as a private equity fund, you first have to find them. Investment teams therefore invest a great deal of their time in deal sourcing, with the hope of identifying promising companies in the investment focus that none of the competing funds have yet discovered. But the reality is different. Online databases and new technologies allow PE funds to digitize and automate their deal sourcing processes. As a result, there is virtually no company left in the market that has not yet been identified and contacted by a PE fund. This is also confirmed in our conversations with entrepreneurs, where we regularly hear “I get an average of two inquiries per week from investors”.
This means that the mere identification of suitable investment targets no longer gives PE funds a competitive advantage. Rather, the issue now is who prevails in gaining access to the identified targets. This is because entrepreneurs respond only to the fewest contact requests from investors. A good positioning, conveyed by a strong brand, is crucial to stand out from the multitude of inquiries. This is also confirmed again and again in our discussions with entrepreneurs. Many choose to respond to our inquiries because they find our approach as an entrepreneurial PE investor (all FLEX partners are entrepreneurs themselves) very exciting. Our positioning thus has a positive effect on the response rate when contacting entrepreneurs and accordingly increases our efficiency in deal sourcing. Therefore, it is even more important for us to build a strong brand with FLEX Capital, which conveys exactly this positioning.
In addition, a strong brand enables more efficient access to deals from within its own network, another important deal source for PE funds. Crucial to deal sourcing through the network is that your network thinks of you first when a suitable deal arises. Normally, this requires endless personal conversations in the network and appearances at seminars and conferences. But strong brand that creates a good reputation can spread to a network like a virus because your reputation, and therefore your brand, precedes you.
2. distinguishing feature in deal making
The German private equity market has grown strongly in recent years. For example, the fundraising volume of buyout funds in Germany has more than tripled from €800 million in 2013 to €2.6 billion in 2019. The growth in fundraising volume is accompanied by an equally strong increase in investment volume in buyouts in Germany. The growth of equity capital in the market has also intensified competition for the best assets. We are also noticing more and more competitors in our investment focus – software and tech companies with 5 to 25 million euros. In addition to existing funds with a similar investment focus, more and more larger funds are approaching us with their investment criteria on the downside, as there is still much less competition for the best assets at smaller ticket sizes.
The intensification of competition is particularly noticeable in sales processes managed by investment banks and M&A advisors. In order to prevail in this deal-making environment, company valuation has long since ceased to be the only means – because competing funds also have sufficient capital to pay high valuations. A strong brand that conveys expertise and builds trust among entrepreneurs can be a differentiator and support assertiveness against other funds in the process.
3. distinguishing feature in fundraising
However, the increased competition among private equity funds is not only noticeable in deal making. It also plays a crucial role in fundraising. More and more funds are fighting for the money of institutional investors. Of course, for these investors, hard facts such as investment focus, fund performance and track record still form the most important basis for investment decisions – and in recent years also positioning and performance with regard to ESG. However, we believe that a strong brand that conveys trust, knowledge and experience has an additional positive signaling effect on potential LPs. For first-time funds like FLEX Capital, this additional signaling effect is all the more important. In fundraising, established funds let their realized returns of previous funds speak for themselves – and are often successful in doing so. This is not so easy with a first-time fund like FLEX, since fundraising for the next fund is usually scheduled before the first exit from the current fund.