Social Capital: Top 5 “Do”s and “Don’t”s for buyout houses on Twitter

October 23, 2009 Leave a comment

I was prompted by an interesting article by Erin Griffith at peHUB to return to a subject that interests me greatly. A little while back, I pondered on the slow uptake of social media amongst buyout houses. Some readers thought it nonsense that any kind of tweeting might bring dividends, whilst others saw some potential, if not the means to reach that potential, past the obstacles that clearly exist.

Well, my aim is not to reopen that particular debate. Private equity and venture capital firms, whether they like it or not, are under increasing regulatory, media and public scrutiny. Ultimately, they must make a choice: stay "closed" and simply watch, as public opinion (and the regulatory change that often follows) is formed without their input, or engage with regulators, the press and the public and influence that opinion.

Of course, some private equity types are already on Twitter, and I’ve collated a bunch in this list so that you can easily follow them, all at once. There is another list for venture capitalists, too.

Anyway, here are five things to avoid if you are working in private equity (I’ll put together a list of things to be encouraged soon):
Things to avoid:

  1. Don’t EVER tweet anything you wouldn’t say to a journalist holding a dictaphone
  2. Don’t set up an account in the name of your firm and expect people other than journalists to follow it. People like people, and they follow them, too
  3. Don’t limit your tweets exclusively to work activity. Although your followers are probably following you because of what you do, the occasional reference to show that you are human won’t hurt. @fredwilson is a VC with a good following (and a great blog) and he gets mad when the Jets lose. It’s not a problem!!
  4. Don’t forget that direct messages (syntax=d [username] [message]) will only be seen by the intended, named, recipient, @ replies that START with the @[username] formulation will be seen by the [username] you reference, those on Twitter that follow both you and that [username], AND anyone that visits your profile page at http://www.twitter.com. If you just want to reference someone in a message that you want the whole world to see, best start that message with something other than the @ sign. Mark Suster has a whole blog entry on the @ sign in tweets
  5. Don’t sign up to any extra services or (perish the thought) games that hook into your Twitter account without checking that they won’t send a tweet “on your behalf” inviting all of your potential business partners to join your mafia gang – some of them even send direct messages. A lot of people have lost a lot of credibility through their interaction with Mobster World and the direct messages it sends to their followers:

    Hey, I just added you to my Mafia family. You should accept my invitation! 🙂 Click here:

    Yikes.

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Do buyouts need more bad PR? At least the PE house is not at fault here!

August 6, 2009 Leave a comment

You can Bank on it:
Delist at that price? You’ll get
Shareholders iRate

Apax Partners (full disclosure – my team is owned by one of their portfolio companies…I like to think it’s Apax’s favourite one :)) is trying to buy Bankrate. And some share holders are not too happy at the purchase price. Apax is paying a premium, of course, but some shareholders are not convinced the premium is fair.

Rather than the concerns of the conflict of interests that may develop between a private equity owner and an incumbent management team (particularly if that management team intends to stick around after the PE house exits), it is the management team itself that may be questioned in this instance. Has the share price been artificially deflated (don’t say sabotaged!) in order to present a more attractive purchase price for the buyout house and the management team/the team’s equity in the new deal?

Do LPs buy funds the same way we buy (or try to buy) TVs?

July 20, 2009 10 comments

How LPs select funds

How LPs select funds

Laid low at home earlier this week, suffering from a thankfully improving bout of self-inflicted food poisoning, I found myself wondering about the thought processes that are involved in an LP making a commitment to a new fund.

In an earlier post, I mentioned the three arguments that I believe are central to any successful fundraising process. If these arguments are sufficiently strong, the fundraising process should run relatively smoothly. A fundraiser must always establish the following:

  1. This market represents a great opportunity, right now and for a considerable time;
  2. This strategy is the most suited to exploiting that opportunity;
  3. This manager is the most able to successfully execute that strategy.

I may have given the impression that I believed that this was all that was necessary to secure an investment, but of course that is not true.

The fund selection process is more sophisticated and the biggest challenge for any fund (but particularly a new fund) is going to be convincing an LP that the time required to properly investigate the fund would be worthwhile.

It is all very well lining up watertight arguments and detailed corroboration, but what good is that if an LP doesn’t get past slide five in your pitch book or doesn’t pick up the PPM?

Not much good at all, of course. Stating the rational case for investment is probably only going to pay dividends once the emotional curiosity of an LP has been awakened.

I think it has a lot to do with awakening fascination, emotional curisosity in the investment opportunity, the investment strategy, or the management team.

You see, as much as the scrutiny of due diligence may reveal about the historical performance of an opportunity, a strategy and a manager, it cannot foretell the future. As everyone in the investment business knows:

Past performance is no guarantee of future results

In order to evaluate the likely future performance of a fund, an LP cannot rely on numbers alone. When an analyst is picking through 50 PPMs, which are the ones that are going to get the most attention and stand an improved chance of being presented to the investment committee? The fascinating ones, of course!

Now, an analyst that values his or her job is not going to present this as a selection criterion. Imagine the response to this statement:

I think we should invest; I’ve always admired Bono and his engagement with imprtant issues. We can trust him with our money,

In all likelihood this fascination with the fund will be rationalised into a more empirical analysis of the benefits of investment. In fact, as the selection process becomes more abstracted from the initial contact with the brand and due diligence begins in earnest, the emotional impact of the brand actually becomes less important.

We select the funds we want to invest in emotionally and assess whether we can invest in them rather more rationally.

I’ve set out how I view this process in a diagram, below:

How LPs select funds

How LPs select funds

In essence, the idea is that most investment opportunities progress by awakening an emotional interest that is then rationalised, before being checked against certain other criteria, including competing investment opportunities. The amount of time that passes between the individual steps can vary between simultaneity and years.

  1. The LP becomes aware of the fund somehow
  2. The LP has some manner of contact with the fund or a fund representative
  3. The LP finds one or more elements of the opportunity, strategy or manager sufficiently fascinating to properly engage with the fund, its materials, or representative
  4. The emotional interest in the fund is rationalised into a more empirical investment case
  5. The LP conducts Due Diligence on the fund
  6. The LP evaluates the fund against those that are perceived to be similar
  7. The LP selects the fund for investment and makes a reccommendation to the board

That’s kind of how I would probably buy a new TV…

  1. Matt hears about the flatscreen TV
  2. Matt sees a commercial about the TV
  3. Matt thinks that the TV would look cool on the living room wall. It’s so shiny!
  4. Matt decides that buying the TV and fixing it on the wall would mean that he could get rid of the old CRT TV and the ugly TV stand…that would mean space for an extra chair in the living room and a more comfortable time when friends come over – how practical!
  5. Matt checks out to see if the TV will be easy to mount on the wall and if it has a digital tuner built in
  6. Matt checks out other, similar TVs
  7. Matt tells Mrs C-G that family C-G simply must invest in this practical, space-saving, TV

Typically, my investment recommendation will be rejected by the committee (Mrs C-G) at this stage. 😦

Does Private Equity “get” social media?

July 16, 2009 12 comments

I’m not talking about venture capital, because those guys definitely get it (well many of them, at least). I’m talking about small buyout houses, mid-market buyout houses and upwards.

1. Fundraising
In markets where LPs and consultants are overloaded with information on new funds coming to market, one would think that a new channel of communication (this is all social media, collectively, are) would be pounced on. And it is free. Have you seen anyone outside of the venture space really doing anything interesting?

2. Deal origination
Particularly in a time when operational expertise is prized over financial engineering, one might expect that a medium perfectly suited to the demonstration of expertise would be a key weapon in the arsenal of any deal origination team. I was fortunate to speak with David Teten on this topic recently and he definitely gets this, too. There is so much that COULD BE done. And so little BEING done. The first team that grasps this and runs with it is going to steal a considerable march on the competition.

I think I am going to give a little more thought to this topic and I ‘d be interested in anyone else’s views.

EVCA Placement Agent Code Spells Trouble for Dodgy Dealers

July 10, 2009 Leave a comment

A firm should not make or offer to make any payment or other consideration with a view to enducing [sic] a third party to enter into contractual negotiations with a client

– that’s according to the Draft EVCA Placement Agents Supplementary Code of Conduct that was released recently.

Yikes. The thought that this goes on, as it clearly has, ought to be shocking. Well, it is shocking even if I feel naive writing that.

But is banning placement agents the answer? Surely it cannot be. Just because a few fraudsters want to line their pockets dishonestly, doesn’t mean that the role of an intermediary in the private equity fundraising process is unnecessary. Ask any GP running a small fund if he/she would prefer to spend more or less time raising money and the answer is pretty clear. If LPs want their fundmanagers to spend their time investing LP cash rather than trying to raise more of it, they had better accept that the placement agent is their friend or, at least, not their enemy.

Frontier Capital – Learnin’s from the ol’ West

June 29, 2009 4 comments
Buffalo Bill's Wild West Show and Congress of ...
Image via Wikipedia

Traditionally, the Venture Capital industry has taken its lead from the West. Sure there are fine firms up and down the US and beyond, but think of venture capital and it’s hard not to imagine Google’s garage or a sarcastic VC cutting through some poor entrepreneur’s far-fetched American dream (or, if it’s 1999, funding it).

Now that probes into the services that 3rd party marketing firms and placement agents offer are causing some concern, VCs need to wise-up on the marketing of their own funds. And it’s not going to be easy.

I’ve written before on certain similarities between the actions of some in the fundraising industry and of those in the Wild West. I wasn’t too complimentary, but I wonder what we can learn from the Ol’ West? Here are some quick pointers:

Firstly, if you can, it’s important to show some kind of track history. After all…

It’s better to be a has-been than a never-was.

But track history isn’t everything, of course; it might have been easy raising your last fund in ’06: You delivered 30%+ IRR and most of the LPs were reckoning on funding their commitments with distribution in any case. But, in 2009, if you can’t show how your teams delivered those returns, you’re sure gonna hear this an awful lot:

Timing has a lot to do with the outcome of a rain dance

And honesty really is the best policy; let’s hear it for bad news, told well. The amount of DD LPs are putting in these days means that it is going to be increasingly difficult to exercise that special sort of creativity that some VCs are rumoured to be indulging in with the valuations of some slightly wonky Chinese portfolio companies. Much better to open the books and tell the story of what happened and what was learned.

Good judgment comes from experience, and a lotta that comes from bad judgment.

Of course, one of the most important skills is getting an upfront read on who might be ready to commit and who is still waiting before making new commitments. It’s like they used to say:

Never slap a man who’s chewin’ tobacco.

So:

  1. Show what you have done
  2. Show how you did it
  3. Don’t just tell the good news
  4. Wait for the right time to tell it

If you get all that licked, you might stand half a chance!

I’ll tail off now..:

Never miss a good chance to shut up.

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This Google Fusion looks interesting…

June 23, 2009 Leave a comment

Try this out…sharing caring fun with charts and graphs.

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