How Private Equity Firms Increase Returns By Being Brand Driven

Fact: companies with strong brands grow faster, are more profitable and sell at higher multiples. We’re not talking about who has the shiniest logo, we’re talking about brands that focus on being strategically and creatively positioned to dominate in their space. In today’s hyper-competitive and often commoditized and under-differentiated markets, stronger brands always win. In Q4 of 2017, Apple dominated the smart phone market driving 51% of the category’s revenues on just 19.3% of total units sold. The next largest share of revenue was Samsung at 15.7% on 18.6% of total units shipped.1 The moral of this little financial comparison? Apple can sell a commodity product with arguably the same functionality and performance for 3X more than Samsung can charge solely because of the strength of the equity in its brand and its relationship with customers. Apple’s customers pay more and buy more. They are more loyal, provide greater lifetime value, protect against market volatility and live for product extensions. Simply, brand-driven companies realize superior financial returns — an incontrovertible fact that happens with all companies, regardless of size.

A Focus On Branding

For private equity and venture capital, a focus on brand positioning and development has historically taken a back seat to the standard financial metrics that measure performance and asset value. It’s a long-standing battle because brand was regarded as an intangible asset. Accounting methods for applying brand equity to the P&L are woefully inadequate in quantifying the benefits and increased value derived from a strong brand. But things are changing. Many PE firms are embracing the power of building brand to accelerate value creation, improve asset performance and increase negotiating leverage to generate outsized returns. Being brand-driven has become an operating best-practice.

Take Burch Creative Capital (BCC) for example. For the last two decades Chris Burch has been hitting home runs building businesses from the brand up. Burch’s brand portfolio includes the recent introductions of ED by Ellen DeGeneres, Cocoon9, Nihiwatu, Poppin and TRADEMARK to a list of established brands including the Faena Hotel + Universe, Jawbone, Next Jump, Powermat, Tory Burch and Voss Water. From the beginning of every acquisition or investment building brand is always at the center of Burch’s strategy. “A company should always start with the brand, then build the business. They say build it and they will come, but build brand first and they will come in droves.” says Burch.

Being brand driven is a conscious choice, a philosophical approach to building value. Adding a focus on brand equity and goodwill has become a core strategic pillar helping build value for shareholders. These firms know the greatest benefit comes from being brand-driven from the outset, not later in the game. They know that strong, well positioned brands drive market dominance, invigorate underperforming assets, or help companies pivot and respond to market changes or competitive threats. And that extending and aligning brand positioning across all constituents, internally and externally, has remarkable power to accelerate growth. For these firms, maintaining and nurturing brand is a necessary and responsible cost of doing business, not a discretionary spend. It’s very much the approach of Burch Creative Capital. As Chris explains, “Why would you not invest in brand? It multiplies your return tenfold.”

Successful, brand-driven firms follow a few simple truths: 

1. A portfolio company’s brand is a principal asset, one to be managed, nurtured, developed and importantly, leveraged. 
2. Focusing on building brand equity from the beginning is the way to maximize a holding’s potential return on investment.
3. Brands should be positioned and aligned with investment goals and the optimal exit path — from the beginning.
4. Strong branding builds sustainable competitive advantage that can survive time, competitive attacks and market fluctuations. A strong brand drives preference, loyalty and reflects future potential. It is a multiple modifier.
5. Brand equity, goodwill, and leverage at the negotiating table are all inextricably interconnected.
6. The powerful effects of a strong brand on the consumer are equally effective on the potential acquirer. Acquirers always gravitate to, and pay more for leading brands, companies with a strong, well articulated and imbued brand with a clear promise of future potential — this is goodwill. 
7. The same brand focus, analysis and rigor is required for any thorough due diligence process for acquisition or merger.
8. The strongest way to mitigate risk and protect investments is to build and maintain brand strength and differentiation in the market.

For brand driven private equity firms, branding is never an afterthought. It is at the core of how they approach building value. Building brand equity is leverage and a multiple modifier. They know branding is a process that marinates best over time and demands great consistency; that it is part science and part art. They see their portfolio companies holistically, from the brand to the numbers, everything aligned, employees and the marketplace walking in lockstep and building both the tangible and the magically intangible side of brand. Looking to generate more growth and larger returns?  Be brand driven. 

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This article was originally published by BRANDThink, LLC, Purveyors of a uniquely capitalistic approach to brand strategy. Read more at https://www.brandthink.biz/blog/brand-driven