The latest instalment of our ‘5 minutes with…’ series; a brief catch-up with private equity operational professionals and service providers to learn about their work and views on current trends.
Together with all other global industries, private equity is scrambling to adapt reputational strategies in an age of disruption. Fund managers working to improve public perceptions are finding that what is morally acceptable is nowadays a moving definition. In a fast-paced environment, fully investigating the track record of a prospective investment can seem a race against the clock.
Emerging technologies may not have created reputational conflicts but they are, experts have long agreed, changing the conversation. GPs or portfolio companies crossing ethical lines will find even minor episodes can, once picked up by social media, quickly escalate into fully-fledged PR crises. The platforms’ open nature means well-informed citizens can interact and criticise firms directly, on their own terms.
As the spotlight builds over private equity, is the asset class fully tapping into the PR potential of online tools? The Drawdown recently put the question to Philipp Aeby, CEO at research and business intelligence provider RepRisk. He discusses self-perception trends in the industry and why blogs, and not social media, could be the best crisis preventer.
The Drawdown (TDD): RepRisk has worked with private equity clients since 2006. Where do you look to help them spot potential reputational trouble?
Philipp Aeby (PA): For us, social media platforms are actually more of a secondary source. In the ESG space, channels like local newspapers, NGO publications and reports from national environmental watchdogs make for much better early warning systems.
We will always try and go to the most mainstream source we can find, especially if conflicts escalate to global outlets such as the Wall Street Journal. However, in the case of private equity, that may not always be available. With big listed companies, it’s more likely that NGOs will come up with relevant reports whereas unlisted, smaller companies can require less-explored sources. Blogs written by individuals, for instance, can be quite relevant in the private equity sphere – those reporting on issues around working conditions and occupational health and safety are particularly interesting. Fake news is not as much of a risk as with political coverage: NGOs and campaigners keen to influence the public on business conduct issues know they have to provide substantiated, material information or else lose their very own reputation as an interest group.
We do monitor social media to make sure we are not missing anything major. They can be useful to gauge the general sentiment around big ESG trends. However, I’m not sure about how much they actually help private equity firms with risk mitigation. Twitter and the other platforms are an important scenario to look at as stories grow bigger but by that stage, things typically have become a real PR crisis and social media are of little help.
TDD: What has been the evolution in your work on private equity reputations, has it become a more technological process?
PA: As said, the challenge with unlisted companies is to find the information. We’ve got more than 500,000 news items coming in every day – with such a flow of content, you have to leverage new technologies. The first step is having systems in place to process all the big data in clusters, while the second is applying AI. The buzzword nowadays is narrow artificial intelligence, an approach that allows us to extract the information that is relevant for private equity managers. Computer linguistics and natural language processing are also part of our process today.
We’ve turned into a technology company and not entirely by choice. When we started back in 2006, we followed a highly manual process but to cover all these thousands of news items every day requires automatic, relevance-based scoring. It’s all a technology play these days – otherwise, with private equity there is just no way you can have a view over what is going on in this globalised economy.
TDD: As private equity enters the spotlight, do you think public image pressures are rising? Are the firms you speak to using your service to monitor their own reputations?
PA: From what we see, the pressure is building. We talk so much about reputational issues but in our view, it’s not so much portfolio companies which are at risk but GPs themselves. Private equity has become one of the most lucrative games in town, high volumes of investor’s money are being poured into the asset class. As they grow more prominent, the question for firms is whether they could end up as the bad guys, same as hedge fund houses a decade back.
For now, private equity houses continue to come to us to track reputational risks at the portfolio company level, not their own. Perhaps things will change. If you look at banks, the know-your-customer rules from the last decade, nowadays more and more names in the sector are using us to benchmark their own reputations. For private equity, the controversy around Uber was a wake-up call, particularly for technology and late-stage investors. If the industry continues to mature, perhaps it will follow the banks’ example in a few years’ time.