Ran Blayer is the founder and CEO of perceptionstrategic reputation management and digital communication agency.
When it comes to reputational risk, not all business models are created equal.
While people tend to like businesses like pet stores or clothing boutiques, private equity firms and hedge funds rarely elicit warm feelings, even when they create value for investors. Managers of these types of companies and organizations usually understand how important their reputation is and how serious the impact on that reputation can be if problems arise.
Referring to his survey of the 2022 Top 50 Hedge Funds, Eric Uhlfelder notes that “preserving investor capital and a company’s reputation should be managers’ top concerns.” And that makes smart reputation management, both for hedge funds and private equity, all the more important.
The ways in which private equity and hedge fund models are structured can create complex risk issues that must be fully understood in order to be managed effectively. While both models share some similarities in terms of risk management, they also differ in some key areas.
Reputational risks for hedge funds and private equity
Some of the most common risks faced by hedge funds include poor performance, leading to negative publicity and investor fear; operational risk from mismanagement; regulatory and compliance issues; or problems through association with a company or industry in which they invest.
Private equity firms also suffer from the above issues, but can also see their reputation tarnished by the actions of a portfolio company. On the other hand, they also risk reputational damage if they are perceived by the public as having treated a portfolio company or its employees unfairly. And since private equity firms typically operate within an expected exit timeline, if a timely exit is not possible, the firm may be at risk from hapless, liquidity-seeking investors.
While there is significant overlap, private equity firms and hedge funds have risk differences. Hedge funds and private equity firms face different regulatory requirements, resulting in different levels of risk of non-compliance. Since hedge funds are more public oriented, there is more chance of negative media coverage or backlash on social media. They may face criticism for market speculation or be seen as an oppositional force to retailers.
Historically, hedge funds have been pilloried for poor performance, while private equity firms have been criticized for their use of debt financing and their management of portfolio companies. Due to the fact that private equity firms often increase value or make failing companies viable by cutting costs, they run the perception risk caused by employee layoffs and other moves.
How funds and companies can address reputational risk
While there is no “one size fits all” solution to mitigate risk or manage the impact of adverse events, there are some common strategies that companies and funds can adopt. It is imperative to understand the operational risks outlined above and have the right processes in place to mitigate risks from things like compliance or cybersecurity. But even the best managed companies and funds are not perfectly insulated from risk. So when a situation arises that creates the potential for reputational damage, it’s essential to have a playbook to hand. Here are three important points to keep in mind.
• Be transparent. Companies and funds must be open about problems and take responsibility where and when necessary. Trying to be coy or evasive further undermines trust.
• Make an action plan. Your plan should address the issue causing reputational damage and should be communicated to investors, the media, company employees – anyone with a relevant interest. Explain how the plan solves the problem and prevents similar problems in the future. The monitoring of such plans is often intensive, so each plan must be carefully drafted. A plan that is perceived as insufficient can cause additional reputational damage.
• Improve performance. Companies and funds emerging from a period of reputational damage will be scrutinized. Improving performance and staying free of controversies can ease concerns and attract new investment or deals. In my experience, a well-performing fund or company can lose reputational damage much more quickly than a company that is struggling to deliver results.
In some cases, professional reputation management for private equity and hedge funds is advisable. While public relations professionals can help manage perceptions, funds and companies can also be served by partnering with a company that specializes in reputation management. When looking for a service provider, look for someone with the right experience and domain expertise to create a holistic reputational risk solution that fits your business and situation, and distributes the solution through the right channels.
When to enter your strategy
It is a common misconception that financial companies need reputation management only when something negative has appeared to restore confidence with current and potential investors or to restore themselves and their reputation. But I believe reputation management should be happening all the time, creating a strong presence and building a controlled situation to mitigate potential negativity. It is important to become the owner of prime ‘digital real estate’, i.e. well-positioned space on search engine result pages. If these positions are kept safe with optimized SEO on appropriate, important and highly ranked platforms, unwanted links will find it difficult to break through the barriers created.
From maintaining regular coverage in target publications through PR to having a corporate social responsibility plan and sustainability policy that you actively promote, reputation management for hedge funds and private equity should be a common thread in any marketing strategy. When it comes to your reputation, once you’re in control, you’ll never have to take control again.