Digital brand building and private equity are two terms that were rarely used in one sentence in the past. There are still private equity funds whose website only consists of a logo and a company address. In order to convince entrepreneurs or LPs, PE funds prefer to let their investment track record speak for themselves or make a name for themselves through personal networking or appearances at conferences. This is different in other asset classes. Most venture capital funds have been pursuing digital brand building strategies for a long time and are increasingly professionalizing them.
Inspired by the VC Funds, we at FLEX Capital have invested a lot in digital brand building over the past 12 months. Among other things, a new corporate identity, website and content marketing strategy were created. The decision to invest in brand building, like every one of our fund investments, had a proven and well-founded “deal rationale”. I have summarized the key points in the following:
1. Differentiator in Deal-Sourcing
In order to make good deals as a private equity fund, you first have to find them. Investment teams therefore invest a large part of their time in deal-sourcing, hoping to identify promising companies with an investment focus that none of the competing funds have yet discovered. But reality looks different. Online databases and new technologies allow PE funds to digitize and automate their deal-sourcing processes. The result: There is virtually no company in the market that has not yet been identified and contacted by a PE fund. This is also confirmed in our conversations with entrepreneurs, in which we regularly hear “I get an average of two inquiries a week from investors”.
Simply identifying the appropriate investment targets no longer gives PE funds a competitive advantage. Rather, it is now a question of who will prevail when it comes to accessing the identified targets. Because the entrepreneurs only react to some contact inquiries made from investors. A good positioning, which is conveyed by a strong brand, is significant in order to stand out from the multitude of inquiries. This is also confirmed again and again in our talks with entrepreneurs. Many decide 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. It is therefore important for us to build a strong brand with FLEX Capital that conveys precisely this positioning.
In addition, a strong brand enables more efficient access to deals from your own network, which is another important deal source for PE funds. The key to network deal-sourcing is that your network thinks of you first when a suitable deal comes up. This usually requires endless personal network conversations and appearances at seminars and conferences. But strong brands that create a good reputation can spread to a network like a virus because your reputation, and therefore your brand, precedes you.
2. Differentiator in Deal-Making
The German private equity market has grown strongly in recent years. The fundraising volume of buy-out funds in Germany more than tripled, from EUR 800 million in 2013 to EUR 2.6 billion in 2019. The growth in the fundraising volume is accompanied by an equally strong increase in the investment volume for buy-outs in Germany. The increase in equity capital on the market has also intensified competition for the best assets. In our investment focus – software and tech companies with 5 to 25 million euros – we are increasingly noticing more competitors. In addition to existing funds with a similar investment focus, more and more larger funds are approaching us with their investment criteria, as the competition for the best assets is significantly lower with smaller ticket sizes.
The increase in competition is particularly noticeable in sales processes that are managed by the investment banks and M&A consultants. In order to assert oneself in deal-making in this environment, company valuation is no longer the only tool – because the competing funds also have enough capital to pay high valuations. A strong brand that conveys expertise and creates trust among entrepreneurs can be a differentiator and support the assertiveness against other funds in the process.
3. Differentiator in Fundraising
The increased competition among private equity funds is not only noticeable in deal-making, however. It also plays a crucial role in fundraising. More and more funds are fighting for institutional investors’ money. Of course, hard facts such as investment focus, fund performance and track record are still the most important basis for investment decisions for these investors – 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. This additional signal effect is all the more important for first-time funds like FLEX Capital. In fundraising, established funds let the returns which they have already realized from previous funds speak for themselves – and are often successful in doing so. With a first-time fund like FLEX, this is not so easy, as the fundraising for the next fund is usually pending before the first exit from the current fund.