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By Jonathan Knowles, Founder and CEO, Type 2 Consulting
and Dr. Richard Ettenson, Associate Professor & Thelma H. Kieckhefer Research Fellow in Global Brand Marketing, Thunderbird School of Global Management


Is Private Equity Good For Brands?

One trend that has gone largely unremarked in the business press is how private equity firms have expanded the range of the asset classes in which they are prepared to invest.

Private equity investment has historically been focused in traditional industry sectors such as manufacturing, mining and telecom: industries with high levels of physical assets. The conventional wisdom is that the transition to private ownership enabled these companies (many whose asset bases have become misaligned with the changing economics of their industries) to be put through a “strategic workout” that might have been impossible to achieve under public ownership (this argument is well expressed in “Private Equity’s Long View,” Harvard Business Review, July/August 2007).

We believe that the “strategic workout” (and the associated charge that private equity firms are “asset flippers”) is only one part of the story. The long-term track record of many private equity firms suggests that they have significant insight into the quality and productivity of the asset bases of the companies in which they invest.

It is therefore interesting to note the extent to which private equity has increasingly been targeting companies whose asset bases include significant amounts of intangible assets – primarily brands. For example, the most recent Dealogic data shows that, globally, the number of private equity transactions in the consumer products/retail sector has tripled since 2003; deal value in this timeframe has increased more than fourfold, and is nearly 10 times the average value during the years 1995 to 2002. Noteworthy transactions involving strongly-branded companies include Albertson’s, Burger King, Dunkin’ Donuts, Hertz, Nieman Marcus and Toys R Us. 

This shift in industry and asset focus among private equity firms provides support for the assertion that many marketers have been making for years – namely that brands represent significant long-term assets of businesses. While this is good news, marketers should not be too hasty in celebrating the fact that brands are now attracting the attention of the private equity community. As with their treatment of other asset classes, private equity firms will prove to be dispassionate and unsentimental owners of brand assets. For brands that have true economic value (that is, those capable of influencing customer behavior sufficiently to generate excess cash flow over time), private equity firms will likely be generous and patient investors. In contrast, for those brands that have diminished relevance with customers and are no longer able to deliver sufficient price or volume impact, private equity ownership may well involve a disruptive “strategic workout” – ranging from a sharp adjustment in the level and nature of the support the brand receives to the outright retirement of the brand.

It is still too early to judge whether private equity firms will be as effective in their management of brand assets as they are of tangible assets. What is already clear is that private equity ownership is bringing a new level of financial sophistication to brand strategy and brand management. Examples of this include:

  • Financial management: The potential for brands to serve as the collateral for securitization is increasingly being explored. For example, Sears created $1.8 billion of bonds backed by the royalties from the Kenmore, Craftsman and DieHard brands and used these bonds to bolster the balance sheet of its Bermuda-based insurance subsidiary.
  • Tax planning: A number of private equity firms are experimenting with the transfer of brands and other forms of intellectual property to specialized IP holding companies invariably based in low tax-rate jurisdictions. These IP holding companies then charge a royalty for the use of the brands to the operating companies, enabling an appropriate percent of earnings to be booked in the lower tax-rate jurisdiction. Up until now, such activity had been confined to companies such as BAT, Nestle, Philip Morris and Shell.
  • Capital planning: The private equity industry is forcing a clearer distinction to be made between “depreciation” spending (spending designed to maintain a constant value of the brand asset) and “capital” spending (spending designed to increase the value of the brand via expansion into new markets). This is a classic application of capital stock management to brands – and forcing marketers to adopt a more sophisticated approach than the traditional distinction between short-term promotional spending and long-term “brand building.”

These examples suggest that marketers will be forced to “up their game” and become more sophisticated managers of this important class of corporate asset. Accordingly, we assert that private equity is good for brands.

About the Authors

Jonathan KnowlesJONATHAN KNOWLES
Founder & CEO, Type 2 Consulting

Jonathan Knowles is the Founder and CEO of Type 2 Consulting – a consultancy that specializes in the brand dimension of business strategy.

Jonathan has a background in finance (Bank of England), strategy consulting (Marakon Associates), creative brand strategy (Wolff Olins), brand equity measurement (Stern Stewart/Y&R's BrandEconomics) and brand valuation (Brand Finance).

This hybrid background has given Jonathan an unusual facility for integrating the marketing and financial perspectives on branding, leading BusinessWeek to describe him as "one of those rare financial guys who understands and appreciates marketing" and MarketingNPV to call him "brand strategist extraordinaire with an unusual fluency in Finance." Jonathan just thinks of himself as being in the business of using branding to make companies more successful.

Jonathan is the co-author of “Vulcans, Earthlings and Marketing ROI” (Wilfrid Laurier University Press, 2008) and was the principal contributor to “Brands: Visions & Values” (J Wiley & Sons, 2001). He is working on a new book – “Sibling Rivals” – about improving the dialogue between marketing and finance.

His articles have appeared in the AMA's Marketing Management magazine, Harvard Business Review, the Intellectual Asset Management magazine, the MIT Sloan Management Review, Professional Investor and The Wall Street Journal.

Richard EttensonDR. RICHARD ETTENSON
Thunderbird Associate Professor and Thelma H. Kieckhefer Research Fellow in Global Brand Marketing

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