Private Equity: Asset strippers or brand builders?

From frozen food and biscuits to fashion chains and a bicycle retailer, private equity funds have built commanding stakes in UK brands. Senior marketers are divided on the pros and cons, writes David Benady

Weetabix: thrived under private equity ownership
Weetabix: thrived under private equity ownership

Private equity firms have a reputation as debt-fuelled opportunists out to make a quick buck by milking brands and selling them off in a rising market. Paying off the debt used to fund an acquisition can mean marketing budgets are instantly slashed.

Some private equity deals have certainly been bad news for brands. Earlier this year, ice-cream maker Loseley collapsed under private equity ownership, while Gala Coral was a challenging investment for its former private equity owners Cinven, Permira and Candover.

Then again, some have thrived under private equity ownership. Birds Eye, United Biscuits and Weetabix are oft-cited examples. They maintained advertising and marketing budgets and have invested in new product development. Meanwhile, smaller funds argue they are all about building entrepreneurial businesses, rather than indulging in the financial engineering of some of the bigger players.

Private equity funds work by building up an investment fund from wealthy individuals, investment funds and pension funds which may account for about 40% or 50% of their capital; this is the private equity side. When they make a purchase, they often borrow the remaining sums from banks and other institutions. They repay this debt out of annual revenue and aim to make a healthy profit when they sell the investment on after a few years.

Switched focus

In the past, the funds bought up manufacturing, mining and telecoms businesses, sold off the plant and assets, and then off-loaded the remains. Since the 90s, however, many have switched focus from 'stripping and flipping' companies with tangible assets to buying those with intangible assets: brands.

For marketers, private equity ownership can be a double-edged sword. Those lucky enough to become part of the management teams incentivised by the funds stand to strike it rich when the exit comes. For others, it can be a rocky ride.

According to Rob Rees, an interim marketing director who has worked for private equity-owned brands, including holiday brand Page & Moy, marketers are right to be nervous. 'There is going to be a lot of fear; they tighten the game up. The private equity funds have more of a focus on which marketing spends are working, so it is very measurable. This is no time for marketers who are fluffy, who just say "trust me, I think this is going to work",' he says.

Rees thinks that the focus on value the funds bring can be healthy and promotes accountable marketing. He warns, however, that some PE funds do not make good brand owners, as they are financial engineers with little business nous. 'A lot of them are just accountants with no feel for business. They understand finance, but they don't smell a rat, they haven't got deep industry understanding. If you've worked in an industry for 35 years, you can smell bullshit a mile away,' he contends. He also says the big incentives for top managers offered by private equity owners can create rifts within companies, as many executives stand to reap far smaller benefits on exit.

Profitable exit

However, Martin Glenn, chief executive of Birds Eye Iglo Group, owned by private equity company Permira since 2006, says funds must build up the brands, or they will be unable to find a profitable exit.

'There remains a perception about asset stripping that doesn't tend to be true, as PE companies can't sell a business that has been stripped to the bone, because no one will buy it,' he adds. 'Permira supports us in advertising not because it has a romantic attachment to it, but because it wants to build the business.'

He believes the biggest issue is the level of debt the PE fund employs to make a purchase. If it is set too high, the fund may struggle to pay off that debt from revenue from the investment. 'We have had a high level of debt we have paid down and we have increased money on advertising and people since the buyout five years ago,' he says.

Glenn argues that Birds Eye has been much better run under private equity ownership than it was as part of Unilever, where he believes it was neglected by senior management. He claims the management team is closer to the owners under Permira's management.

Build up knowledge

To build up their knowledge of business, many funds have hired executives steeped in marketing to aid their understanding of brands. US fund Clayton Dubilier & Rice has hired luminaries such as former Tesco chief Sir Terry Leahy, former Procter & Gamble chief executive AG Lafley and ex-Unilever executive Vindi Banga.

In the UK, funds have also hired experienced marketers and business people to advise on acquisitions. Langholm Capital, which has invested in Dorset Cereals, Tyrrells crisps and Bart spices, has brought in Steven Esom, the former Waitrose managing director and ex-head of food at Marks & Spencer. He says the fund looks to buy mid-sized family or entrepreneur-run businesses that are aiming to grow over three to five years. While he accepts that some private equity funds are mere financial engineers, Esom says Langholm is different.

'We see ourselves as brand builders. Without a strong brand, you haven't got a business. That sets us apart. We are less reliant on financial engineering and more focused on maximising returns; you have to grow the top line, and the bottom line will take care of itself,' he adds.

Meanwhile, Piper Private Equity, which has invested in Boden and Maximuscle, recently appointed Adam Balon, a founder of fruit drinks brand Innocent, as an adviser. 'Piper is about building brands, turning small brands into bigger ones, to create growth at an early stage,' he says.

'I like the idea of creating something out of nothing. There is a misconception about private equity. There are those that take a big cash-flowgenerative business, take on debt, then run it into the ground. That doesn't add value; it is very different from what we do.'

Piper, which was a brand consultancy before becoming a private equity fund, looks to make investments of £5m to £15m in businesses with the kernel of a strong marketing idea, and then to increase sales over three to five years.

'It is about operational improvement, making a better business,' adds Balon.

Height of the market

An important issue is whether funds that bought brands at the height of the market in 2007 will manage to find an exit now there is less money around.

Kirsty Sandwell, partner for private equity at accountants Baker Tilly, says: 'In the boom times, when private equity funds were making a lot of money out of retailers and brands, many jumped in rather than stick with investments they understood. Just because you have experience investing in companies that clean drains, doesn't mean you understand retail businesses or brands.'

She points to ice-cream brand Loseley, which collapsed with the loss of 83 jobs shortly after private equity investor Foresight withdrew funding this spring. The brand name has since been sold on.

'It was a strange investment for Foresight, which has historically been an investor in tech businesses. Why on earth would it be a good judge of whether an ice-cream firm is a good business? You need to invest in areas you understand,' says Sandwell.

However, Foresight marketing manager Louise Farley says it is an outdated perception that the group specialises in tech businesses, as it now has a much wider portfolio. It took on Loseley when it acquired the fund which owned it from Acuity Capital, earlier this year.

Other private equity investments struggling to find an exit include fashion retailer New Look, which cancelled a stock market flotation last year. The recent departure of the chain's marketing chief, Nick Cross, after just six months in the job, raises the question of whether long-term brand building is compatible with private equity ownership.

New Look is 55% owned by Permira and Apax. Cross left in May to 'pursue other interests', just as his first New Look TV ad campaign, through ad agency Mother, went on air.

Private equity investments come in many flavours, from big funds raising debt to buy cash-generating businesses to smaller venture capitalists looking to boost entrepreneurial businesses.

Marketers can get lucky and become part of a fund's incentivised management team. Failing that, they had better hope the private equity investors understand the importance of brands.


Marketers are sceptical about how sympathetic private equity investors are to marketing and brands, according to a survey of top marketers conducted by consultancy Brand Learning for Marketing.

- Two-thirds of senior marketers questioned disagreed that most private equity investors have a good understanding of marketing and are sympathetic to it.

- The overwhelming majority believed PE investors are more interested in driving sales than building brands, and most thought marketers are right to be nervous if their brand is acquired by a private equity fu nd.

- The senior marketers were split over whether PE funds will play more of a role in funding brands despite the downturn, with about half agreeing and half disagreeing.

Brand Learning is a consultancy in marketing capability development. The survey was conducted in the first week of August among 50 senior brand marketers.


Private equity brand investments


  • Permira - AA, Saga, Birds Eye Iglo, Hugo Boss and Valentino, Telepizza.
  • Piper Private Equity - Bottle Green, Boden, Diet Chef, Maximuscle.
  • Langholm Capital - Bart Spices, Jordans, Tyrrells.
  • Isis Equity Partners - Bonmarche, Crew Clothing, Fat Face, Wiggle.