In an op-ed for RealClearMarkets, Managing Director Devin O’Malley writes that today’s political and media environment necessitates the need for investors to expand the boundaries of due diligence.
The private investment and alternative asset management industries celebrated earlier this year when congressional Democrats dropped proposed changes to carried interest tax treatment from the Inflation Reduction Act. While that was an important victory, an even greater threat still lurks around the corner.
Imagine this hypothetical: a private equity firm conducts due diligence on a U.S.-based Energy-as-a-Service (EaaS) company that helps state and local governments reduce their carbon emissions. As part of its newly created headline risk assessment process, the firm briefs its public affairs consultant on its EaaS acquisition target, the EaaS company’s business model, additional financial information, and past compliance issues related to government contracts.
The investment firm expresses optimism over the impact of congressionally approved grants and tax credits for renewable energy technologies, which immediately sets off alarm bells for the public affairs executives. Republicans are poised to launch a once-in-a-generation oversight effort in January, and a renewable energy company receiving taxpayer-funded grants and tax credits despite past allegations of government contract fraud would be a ripe target.
But much of the industry scrutiny that emanated from the halls of the U.S. Capitol is relocating to the halls of the Federal Trade Commission and the U.S. Securities and Exchange Commission, whose authority is sometimes ambiguous but reach is far.
Politics drives media coverage, which in turn influences politics. Understanding these basic political dynamics allows investors to properly position their firms and create value for investors. Asset managers can take steps now—as they conduct due diligence—to protect themselves from the unwanted attention of media, political activists, regulators, and lawmakers.
Venture capital and private equity firms assess everything from a company’s workforce and information technology to intellectual property and financial statements. Today’s political and media environment requires these investors to expand the boundaries of due diligence. The notion that “everything is political” applies to the financial services industry more than ever. As a result, firms should consider their due diligence incomplete without conducting a headline risk assessment. In addition to the traditional considerations of financial risk and opportunities, this assessment would also evaluate potential reputational costs that could be associated with a particular investment.
Investment teams have decades of deal experience to inform the potential headlines an investment could generate, but firms should not rely on institutional knowledge alone. Just as a firm establishes a roster of operating partners to advise on deals, it is equally critical to treat headline risk assessment on par with other areas of risk generated by a deal. Walking a trusted public relations or public affairs partner through the intricacies of a potential target can provide the firm with a valuable perspective forged by years of crisis and reputation management experience. Many investors already enlist these partners to assist with investments gone awry; they should just as commonly enlist them at the beginning stages too.
Alternative asset managers may be comfortable moving forward with certain levels of headline risk. In these instances, their public affairs advisers should develop an exhaustive communications plan that proactively places its client in a position of strength through robust stakeholder outreach and diverse coalition building. These partnerships allow the investor to deploy proactive storytelling tools like video testimonials, digital advertising, economic research, and earned media to head off or mitigate potentially negative media coverage. The costs associated with thoughtfully developing and implementing such a plan on the front end far outweigh the cost of explaining investments gone awry to limited partners and other institutional investors.
Geoffrey Cullinan noted in Harvard Business Review in 2004 that, “[d]espite their often immense importance, negative synergies are routinely overlooked in due diligence.” In 2023, where there is no end to the political ripple effect, there may be no more overlooked negative synergy than headline risk.
Seeking advice and counsel from public affairs professionals during due diligence can help avert a disastrous investment, but more fundamentally will allow investment managers to take the necessary steps to create value and protect their firms, their investments, and their investors.
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In an op-ed for RealClearMarkets, Managing Director Devin O’Malley writes that today’s political and media environment necessitates the need for investors to expand the boundaries of due diligence.
The private investment and alternative asset management industries celebrated earlier this year when congressional Democrats dropped proposed changes to carried interest tax treatment from the Inflation Reduction Act. While that was an important victory, an even greater threat still lurks around the corner.
Imagine this hypothetical: a private equity firm conducts due diligence on a U.S.-based Energy-as-a-Service (EaaS) company that helps state and local governments reduce their carbon emissions. As part of its newly created headline risk assessment process, the firm briefs its public affairs consultant on its EaaS acquisition target, the EaaS company’s business model, additional financial information, and past compliance issues related to government contracts.
The investment firm expresses optimism over the impact of congressionally approved grants and tax credits for renewable energy technologies, which immediately sets off alarm bells for the public affairs executives. Republicans are poised to launch a once-in-a-generation oversight effort in January, and a renewable energy company receiving taxpayer-funded grants and tax credits despite past allegations of government contract fraud would be a ripe target.
But much of the industry scrutiny that emanated from the halls of the U.S. Capitol is relocating to the halls of the Federal Trade Commission and the U.S. Securities and Exchange Commission, whose authority is sometimes ambiguous but reach is far.
Politics drives media coverage, which in turn influences politics. Understanding these basic political dynamics allows investors to properly position their firms and create value for investors. Asset managers can take steps now—as they conduct due diligence—to protect themselves from the unwanted attention of media, political activists, regulators, and lawmakers.
Venture capital and private equity firms assess everything from a company’s workforce and information technology to intellectual property and financial statements. Today’s political and media environment requires these investors to expand the boundaries of due diligence. The notion that “everything is political” applies to the financial services industry more than ever. As a result, firms should consider their due diligence incomplete without conducting a headline risk assessment. In addition to the traditional considerations of financial risk and opportunities, this assessment would also evaluate potential reputational costs that could be associated with a particular investment.
Investment teams have decades of deal experience to inform the potential headlines an investment could generate, but firms should not rely on institutional knowledge alone. Just as a firm establishes a roster of operating partners to advise on deals, it is equally critical to treat headline risk assessment on par with other areas of risk generated by a deal. Walking a trusted public relations or public affairs partner through the intricacies of a potential target can provide the firm with a valuable perspective forged by years of crisis and reputation management experience. Many investors already enlist these partners to assist with investments gone awry; they should just as commonly enlist them at the beginning stages too.
Alternative asset managers may be comfortable moving forward with certain levels of headline risk. In these instances, their public affairs advisers should develop an exhaustive communications plan that proactively places its client in a position of strength through robust stakeholder outreach and diverse coalition building. These partnerships allow the investor to deploy proactive storytelling tools like video testimonials, digital advertising, economic research, and earned media to head off or mitigate potentially negative media coverage. The costs associated with thoughtfully developing and implementing such a plan on the front end far outweigh the cost of explaining investments gone awry to limited partners and other institutional investors.
Geoffrey Cullinan noted in Harvard Business Review in 2004 that, “[d]espite their often immense importance, negative synergies are routinely overlooked in due diligence.” In 2023, where there is no end to the political ripple effect, there may be no more overlooked negative synergy than headline risk.
Seeking advice and counsel from public affairs professionals during due diligence can help avert a disastrous investment, but more fundamentally will allow investment managers to take the necessary steps to create value and protect their firms, their investments, and their investors.
Read the piece on realclearmarkets.com