Alternative Asset Managers Have a Growing Responsibility – Crisis Preparedness
February 28, 2023
Portfolio company investments are regularly made through the lens of whether the commitment fits within the broader investment strategy and will generate returns. But elements often overlooked are the reputation of the company and the potential for negative scenarios to arise.
With the viral nature of today’s news cycle and the continued proliferation of digital media, negative comments or actions can snowball and cause lasting damage to not only the portfolio company but also the private equity sponsor. Crisis management is now a fast-growing area of responsibility for alternative asset managers.
For example, if a General Partner (“GP”) invests in a consumer-facing asset such as a shopping mall and a consumer injures themselves while on site, the oversimplicity of the news cycle could lead to a cascade of stories and social posts focused on the financial sponsor’s ownership of the mall being a root cause for the incident. Often, the narrative centers around the longstanding perception that private equity owners are solely focused on optimizing cash flow by slashing expenses.
Those familiar with the nature and nuances of the private equity industry are well aware that such an exaggeration and oversimplification of an issue is likely misconstrued, but once the story begins to build and multiply on platforms such as Reddit, Instagram and TikTok, it can be very hard to dispel the notion and regain control of the message around the incident and the asset.
That’s why it’s critical for private equity firms to consider various contingency scenarios and communication strategies to stay ahead of any potential negative situation that could arise at a portfolio company.
Some key considerations include:
- Conduct financial and reputational due diligence: Private equity firms must take a proactive approach to mapping and understanding the potential risks and challenges underlying a company’s business, strategies and long-term goals to ensure they do not become company- or sponsor-defining events.
- Develop a crisis playbook for the firm and each portfolio company: This comprehensive exercise should reflect all perceptions and audiences, while also outlining potential responses, owners and likely communication channels for activation.
- Socialize and train leaders: Assign owners and leverage simulations so leaders, along with company management, are familiar with established protocols and processes before a crisis strikes and are able to move swiftly if needed.
- Always monitor and assess: Nearly every industry is dynamic and ever changing, so sponsors must actively monitor coverage and conversation on the sector and their portfolio companies to evolve the playbook as needed.
If a situation does occur, it’s important to also conduct a post-crisis analysis with the team to evaluate what worked well and if processes need to be adjusted.
Jordan Fisher, Senior Vice President and Mustafa Riffat, Executive Vice President at Edelman Smithfield.
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