16 June 2024

Why purpose is private equity’s next differentiator

| The European |

Purpose-driven companies outperform their competitors, win customer preference and attract the best talent, says Nick Ranger of Brandpie

With private equity (PE) fundraising and M&A activity ramping up over the last year, the opportunities for PE firms has magnified. But with changes in shareholder expectation, and mounting pressure from regulators, businesses, and wider society – so too have the risks. Having a strong ESG policy was once thought to be the risk mitigating, competitive edge for PE firms. But given the fact that some of the largest private equity firms recently announced the first standardised set of ESG reporting metrics – having a strong ESG policy has now become table stakes.

That’s where “purpose” comes in. Purpose, not in the social impact, brand, or environmental sense. But the ultimate “why” in your corporate strategy that influences every aspect of your business. When two purpose-driven businesses meet, it’s like clockwork. Even if you’re a specialist PE firm that only targets X sector in Y country – if you, and the growth stage startup you’re looking to invest in, lead and operate with purpose, you can set yourself up for a path of growth and success.

When done correctly, a shared sense of purpose is mutually beneficial for both the PE firm and the businesses its looking to invest in. It shows that the PE firm is aligned to the long-term growth objectives of the founder and reassures the employees of the company to be invested in that the PE firm has their interests at heart. 

Why? Because purpose can be the great equaliser that brings like-minded businesses together. Earlier last year Bowmark Capital, a mid-market PE firm, announced its investment in Kubrick Group, a leading provider of next-generation technology. A great move given Kubrick’s commercial success, but also because both businesses are inherently purpose-led, and channel this through their internal culture and values. 

Responding to the announcement, Tim Smeaton, Founder and CEO of Kubrick said he was “delighted to find a partner that shares our values.” The alignment of purpose and values is a powerful way of helping businesses to understand whether they’re going to be a good fit for each other. It helps the two businesses position themselves in the right way to each other – not too dissimilar from how a brand positions itself to its customers. 

Similarly, M&A also requires a meeting of shared purpose and values. When ERT and Bioclinica were in the process of defining their new purpose, both businesses were thinking about which values they shared with each other. And Clario was born – an organisation that positions itself as one that is ‘driven by our purpose to transform lives by unlocking better evidence’ – connecting the best of ERT with the best of Bioclinica. 

About the author
Nick Ranger is Managing Partner at business transformation specialists Brandpie. 

While some may be quick to dismiss the “shared purpose and values” argument as woolly and trite, history shows that time and time again, it’s the underlying reason behind some of the most successful PE investments, buyouts and acquisitions. It enables both parties to get to where they need to much faster, and with less growing “together” pains than they would otherwise have. 

Binding values
Whether you’re in an M&A situation or a private equity situation, purpose is the glue that binds businesses (that could otherwise be worlds apart from each other) together. And purpose begets growth. A 2019 study by Harvard Business Review found that across 28 different companies that had an average compound annual growth rate of 30% or more in the previous five years, they all shared one common thread: they built their purpose into everything they did. 

There is a wealth of research to also support the fact that purpose-driven companies outperform their competitors, win customer preference, attract talent, increase wellbeing, bolster reputation management, and provide strategic clarity. That’s why CEOs won’t stop talking about being purpose-driven. Brandpie’s 2021 CEO Purpose Report found that CEOs rank company purpose as the most important factor for driving business growth. 

To cite a clichéd, yet apt phrase, people buy people. They don’t buy businesses, or services. They buy from individuals that they can trust. And if you can trust another organisation to do right by its employees, shareholders, and the wider world, you can trust that they will do right by you. And that applies for both the PE players and the businesses they’re looking to invest in.

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