Rethinking Value Creation: Elevating Private Equity Communications in APAC

The phrase “a rising tide lifts all boats,” an aphorism commonly associated with the late John F. Kennedy, has been aptly applied to describe the ever-expanding state of the global private equity market since the Global Financial Crisis (GFC). Taking into consideration total global assets under management have ballooned almost six-fold from US$1.5 trillion in 2008 to US$8.6 trillion in 2023, according to data from Preqin Pro, it isn't hard to see why there has been a pervasive sense of optimism across the industry.

Navigating a Turning Tide

In Asia Pacific, where the pace of funds flowing into the venture capital and private equity market has continued to accelerate, overtaking North America and Europe in recent years, the horizon has looked particularly bright. Favourable conditions for economic growth, a generally supportive regulatory environment, and an increasingly dynamic cross-border alternative investment ecosystem all pointed to favourable seas ahead for general partners (GPs) looking to tap into the region's deepening pools of capital.

The tides of fortune, however, look to be turning. Funds targeting Asia Pacific raised just US$30 billion in the first three quarters of 2023, a small fraction of the more than US$85 billion seen in 2022 and US$127 billion the year prior. Furthermore, the sentiment that headwinds could persist is gaining traction. According to a recent survey by global law firm Dechert, private equity fund managers in the region identified fundraising as their biggest challenge, as discerning limited partners (LPs) look to concentrate allocations in a fewer number of funds.

On the prospect of improving exit pipelines, the tone has been similarly uncertain among GPs and LPs. Data from AVCJ Research highlights that total private equity exit values in Asia Pacific for 2023 came in at a mere US$38 billion, which marks a 67% decline compared to the US$119 billion recorded in 2021. While there are growing hopes that 2024 will herald in a year of falling interest rates, rising public market sentiment, and a more predictable geopolitical environment, the rekindling of a historically lackluster global deal-making environment so far remains to be seen. 

Refocusing on “Fundamental Value Creation”

It would be an understatement to say that the current private equity environment is challenging, but arguing it is completely unprecedented or unexpected would be overly sensationalist. 

In recent conversations with private equity fund managers and institutional investors there is a general consensus that the storm clouds being navigated today have been brewing for some time. Amid a rising sea of capital flowing into the industry, competition among regional GPs for commitments and deal opportunities have been intensifying for years. This, coupled with an increasingly sophisticated institutional investor universe keen to dig deep into the drivers of persistent performance, has meant a continual process of "upping your game" to stay relevant.

Looking at things from this perspective the current environment has simply been a catalyst to refocus industry attention on “fundamental value creation” after years of dependence on multiples expansion and financial engineering to deliver attractive returns to investors. Marc Nachmann, Global Head of Asset and Wealth Management at Goldman Sachs rightly argued in a recent interview with the Financial Times that this approach ”will be harder to do going forward."

Rethinking Strategic Communications as a Value Creation Lever

What does this mean for GPs? It will mean a widening bifurcation between the winners who force themselves to view value creation in a more holistic way and the losers that fail to adapt to the changing realities of the market. It is prudent to remember that times of uncertainty and turbulence are often an opportunity to reposition for long term success. Key to this is rethinking entrenched ways of doing things and reframing beliefs of where value can come from. 

We have seen many GPs in Asia Pacific start to realise the potential of adopting a more intentional approach to strategic communications and investor relations. In the past it was common for fund managers to view these closely related functions as a necessary operational checkbox rather than a meaningful contributor to a firm's overall value creation strategy. More often than not reactive, operationally siloed, and focused on near-term execution. This outdated perspective is quickly shifting in favor of one that seeks to identify ways to bring alignment across the firm to achieve a broader range of strategic objectives. 

While the uniqueness of every firm needs to be appreciated, there are five common hurdles we see across private equity GPs looking to modernise their strategic communications function: 

1. Treating “institutional investors” as homogenous: The identity of an LP is almost as unique as a fingerprint. They differ in terms of their needs, culture, governance, sophistication, systems, familiarity with particular asset classes, and much more. This fact also holds true within institutional investors sub-types like sovereign wealth funds, endowments and family offices. Appreciating these differences helps inform a more personalised engagement program. The wonderful thing about the industry today is there are many alternative data providers that allow GPs to take their existing investor databases and overlay new insights and predictive analytics to continually refine their approach.
2. Underestimating the importance of narratives: This factor is often overlooked or underinvested in despite its critical importance. A core narrative is a firm's "golden thread" that anchors communication initiatives across all channels. So, what makes a good narrative? It comes down to three key variables. It must be compelling, grounded in the context of today in a way that resonates with your key audiences; it has to be unique to you, clearly articulating the “whitespaces” a firm can authoritatively own; and, perhaps most importantly, true. Embracing the importance of narratives empowers the firm to communicate with consistency and impact to build credibility in its value proposition, as well as protect its hard earned reputation through uncertainty.
3. Failing to see communications beyond the GP-LP relationship: Fund managers sometimes see communications and, even investor relations to some extent, solely as an external marketing effort to reach LPs. Even the most veteran of fund managers have admitted not seeing a need for broader stakeholder engagement and monitoring. In their mind it is the GP-LP universe that takes precedence. This could not be further from the truth. Every external engagement and channel touchpoint is an opportunity to gather insights in a two-way feedback loop that can support strategic objectives. If properly constructed, a well-designed strategic communications infrastructure can aggregate seemingly disparate information from a wide range of quantitative and qualitative sources into a useful intelligence channel that informs decision making. 
4. Seeing content development as a nice to have: Regularly producing a steady cadence of thought leadership is a common challenge for firms. This is often due to a lack of resources or a failure to effectively repurpose high-quality content to maximise impact. It is easy to forget that the content you choose to create serves a range of purposes. On the one hand, it is one of the first touchpoints a stakeholder has into the “DNA” of a firm. It can offer valuable insights into how a fund manager thinks, operates, and positions itself among its peers. On the other hand, it is also a tool to keep stakeholder relationships warm and encourage conversations in new creative ways.
5. Neglecting crisis preparedness: The desire to manage a crisis quickly and effectively is always top of mind in the heat of the moment, but properly preparing for one is often neglected. The threat landscape is evolving quickly, increasing the vulnerability of all businesses and amplifying the need for fund managers to carefully consider their ability to respond effectively. Crises can emanate from anywhere - poor conduct, cyber incidents, ESG failures, investor activism, and more - and impact more than just the GP. The mishandling of a crisis or issue at a portfolio company has the real potential to cause irreparable harm to the reputation of a GP. Indeed, the old adage that “a small leak can sink a great ship” rings true in this case. In response we are seeing more fund managers encourage portfolio companies to adopt robust crisis response plans in an effort to emerging mitigate risks and protect the value of their investments. 

All of these factors should come together in a systematic and dynamic fashion to reinforce a firm's ability to move the needle toward a defensible competitive advantage in the eyes of investors and investees alike. As the coming tides ebb-and-flow, I firmly believe GPs are well-positioned to transform the way they approach value creation, it is just a matter of taking the first step into uncharted water.

The views expressed herein are those of the author(s) and not necessarily the views of FTI Consulting, Inc., its management, its subsidiaries, its affiliates, or its other professionals

FTI Consulting, Inc., including its subsidiaries and affiliates, is a consulting firm and is not a certified public accounting firm or a law firm.