Private Equity: Why Brand Marketing Adds Value to PortCos

This article is written by ZenithRise Group, a marketing services firm based in California and North Carolina serving Private Equity Portfolio Companies around the US.

While working with a leading US consumer Private Equity firm, we saw first-hand the impact a balanced operational cost-cutting and growth oriented marketing-based approach takes towards growing PortCo values. Marketing specifically was seen as an engine for growth and was given the air-time it needed during the integration phase. 

Of course, value generation through cost rationalization post-acquisition (and while holding) is a widespread and necessary PE practice. However, as we learned with this client, it is not the only practice. And as we continue our discussions within PE today, we are learning that more and more, buyers are asking the question “How much of what I am buying provides the foundation for future cash flows and specifically future cash flows at a premium over the competition?”

This very question necessitates that, while holding their PortCos, PE firms invest in the growth of the top-line through Brand Marketing. Here’s a few reasons why:

1. Brand Positioning is a precursor to Brand Marketing. And Brand Positioning forces clarity in direction by requiring a clear Brand Positioning. Brand Positioning is rooted in what the customer needs, wants and will pay a premium for. It is also rooted in how the PortCo will deliver to these needs and wants in a way that its competition can’t. The process of developing clear Brand Positioning is an organization-wide process that requires deep participation of the C-Suite, Product Sales, Customer Success, Operations, Finance and HR. It forces the PortCo to align to a direction and enables the PE firm to understand the direction it is investing in.
   
   
2. Brand Marketing drives revenue growth. To incur revenue, you have to move people to the bottom of the funnel, where Sales seals the deal. To get people to the bottom, you have to drive them to the top and through the middle. An investment in Brand Marketing, provided the Brand is compellingly positioned, bring them into the top and keeps them engaged through the middle.
   
   
3. Investing in Brand and Marketing also helps increase valuation through
   
   
   • Cash flow growth. Strong brands, properly positioned and properly marketed (with the right creative, right messaging and through the right channels) generate price premiums over the competition. These price premiums result in higher cash flows which in turn drives higher valuation.
     
     
   • Higher Customer Lifetime Value. When a brand promises something, provided that it is unique and consistently delivered, customers become more loyal to the brand because they know what to consistently expect. And when customers become more loyal, their lifetime revenue to the brand increases without necessarily a proportional increase in the cost to retain them. This translates into higher per customer margins and ultimately higher cash flow come valuation time. 
      
   • Higher applied multiples. Brand and Marketing investments can command higher multiples to apply to these cash flows. When a PortCo has an intangible asset such as a brand that creates mental and emotional barriers to entry for the customer (over the PortCo competitors), there is reasonable grounds for PEs to justify higher multiples come valuation time.
     
     
   • Cost synergies. For example, a brand consistently invested in and communicated to the market (both customers and employees) reduces human capital costs. When a PortCo has a clearly positioned Brand, as long as employees believe in that positioning, they will want to stay – because they know what to expect. Candidates that understand the Brand will also preferentially join over the competition. This streamlines talent acquisition and retention costs. As another example, the clearer the positioning and messaging of a brand, the fewer marketing message ‘variants’ are required to be produced during execution and the cheaper the marketing production costs.
     
     
4. Brand Marketing investments in digital marketing streamline the ability to enter into new segments and new markets. Digital Marketing platforms, and most notably Google Ads, have sophisticated targeting capabilities that allow for efficient entry into new segments. And the geofencing capability within these platforms (essentially, the ability to target a location with a message) assists with new market entry. Not to mention enhanced performance measurement systems for improved decision making because of an abundance of data to draw from.
   
   
5. Brand Marketing can support the exit strategy the PE firm seeks. In the case of IPOs, strong marketing of the brand improves public perception, investor perception, commands a share premium and generates increased media coverage. In the case of M&A, buyers (especially those with long-term holding horizons) are assured by the customer loyalty that a strong brand brings. And in the case of the secondary sale to new investors, a company that has been well-marketed is easier to pitch for new funding.
   
   

Brand Marketing complements operational synergies. While the PE firm and (potentially new) PortCo management is working on driving the bottom line through operational streamlining, the market will not stand still and neither will competitors. The business still needs to be run and the top-line still needs to be grown. Those that marry the two as simultaneous exercises stand to reap the most value long-term.