There are exceptions to every rule, but I believe most private equity firms do themselves and portfolio companies a tremendous disservice by underinvesting in marketing the brands they acquire.

I should note that I have a bias. I am, of course, a marketer. But I am also an unabashed capitalist and define some semblance of my personal success on my own economic accomplishments. So please, allow me to explain.

For the uninitiated, private equity (PE) firms typically identify and acquire companies they believe have potential for growth or improvement, taking control of underperforming businesses or those with strong fundamentals, but facing operational challenges.

After acquiring a company, PE firms typically invest capital to enhance  operations—upgrading technology, expanding product lines and perhaps entering new markets. This could also involve restructuring, reducing costs, improving supply chain management or optimizing processes to enhance profitability or all of the above. The primary goal is, of course, creating value in portfolio companies, which in turn, generates returns for investors and targets an exit.

In the list of typical investments, you may have noticed one key omission: Improving the brand—perhaps the most important aspect of any product.

After all, do you buy things with bad brands? No, not if you can avoid it. It’s why we read online reviews before watching movies or eating at restaurants. We look up plumbing service providers or even doctors before engaging them. It’s also why, after a Valuejet Airlines plane crashed in the Florida Everglades, the company rebranded to Air Tran. The airline’s brand was worthless. 

A strong brand is arguably the most valuable asset a company owns as it seeks differentiation in a crowded marketplace or customer loyalty, works to attract top talent and creates a perception of value and trust. If you walk into a McDonald’s anywhere around the world, you know you’ll get french fries that are pretty darn good.

A strong brand should be the locomotive driving the train that is a company’s long-term success, playing a key role in customer perception, loyalty and overall market position. And by investing in the development and management of a brand, PE firms further-strengthen their competitive edge for that organization.

But it’s a rare occurrence. A few reasons as to why:

• Austerity: PE firms typically implement cost-cutting measures to maximize profitability quickly, leading to reductions in discretionary spending, including marketing budgets, which are often seen as non-essential compared to core operational needs.
• Short-term horizon: The investment horizon is usually three to seven years, minimizing the perceived incentive to invest in burnishing the brand, which is often seen as a long-term strategy to build customer loyalty and brand equity.
• Metrics: PE firms focus heavily on measurable financial metrics. And historically, the benefits of strengthening a brand can be intangible and harder to quantify in the short term.
• Strategic priorities: Many PE firms prefer to prioritize operational improvements, such as increasing efficiency or reducing costs over investing in brand development, which does not immediately impact the bottom line.
• Exits: In some cases, PE firms may aim to prepare a company for sale rather than invest in its long-term growth. They might believe that enhancing operational efficiency or optimizing financials will be more attractive to potential buyers than significant investments in brand marketing.
• Industry characteristics: In certain industries, particularly those where competition is based on pricing or product features rather than brand loyalty, private equity may feel that investing in brand marketing is less critical.

There are some PEs investing in the brands of their portfolio companies: Leonard Green & Partners, CVC Capital Partners, and Compass Equity Partners (which partners with Elasticity) come to mind. But they are the exception rather than the rule. 

I have found much of the rationale for what is largely an industry-wide underinvestment to be nonsensical. For example, in today’s digital landscape, a realistic horizon for a complete brand refresh could occur within six to twelve months.

Ultimately, if you can enhance an organization’s brand—more people want to do business with it, more people buy its product or service. 

It’s just that simple. Thus, the short-sighted failures of PE’s underinvestment only weakens long-term prospects of a portfolio company.