When it comes to reputational risk, not all business models are created equal. While people are predisposed to like businesses such as pet stores or clothing boutiques, private equity firms and hedge funds rarely inspire warm feelings, even when they create value for investors. Managers of these types of firms and organizations usually understand how vital their reputation is and how serious the impact can be on that reputation if issues crop up.
Concerning his 2022 Survey of the Top 50 Hedge Funds, Eric Uhlfelder remarks that “preserving investor capital and a firm’s reputation should be managers’ most important concerns,” explaining that establishing a reputation in this field takes time and work, and if hit with a huge drawdown, that reputation can instantly get wiped out. And that makes smart reputation management—for hedge funds and private equity alike—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 to be effectively managed. While both models share some risk management similarities, they also diverge on a few key points.
Reputational Risks Faced By Hedge Funds And Private Equity
Some of the most common risks hedge funds face include poor performance, leading to negative publicity and investor anxiety; operational risk due to mismanagement; regulatory and compliance issues; or problems via association with a company or industry in which they invest.
Private equity firms suffer from the above issues, too, but can also have their reputation sullied by the actions of a portfolio company. On the flip side, they are also at risk of reputational harm if they are viewed by the public as having treated a portfolio company, or its employees, unfairly. And given that private equity firms typically operate under an expected timeline for exiting, if a timely exit is not possible, the firm may face risk from unhappy, liquidity-seeking investors.
While there is considerable overlap, private equity firms and hedge funds do have risk differences. Hedge funds and private equity firms face different regulatory requirements, which creates differing levels of risk for non-compliance. As hedge funds are more public-facing, there is increased potential for negative media coverage or social media backlash. They may face criticism for market speculation or be perceived as an oppositional force to retail traders.
Historically, hedge funds have been more likely to be pilloried for poor performance, while private equity firms have drawn criticism 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 face perception risk created by employee layoffs and other moves.
How Funds And Firms Can Address Reputational Risk
While there is no “one size fits all” solution for mitigating risk or managing the fallout from negative events, there are some common strategies firms and funds can employ. Understanding the operational risks outlined above—and having appropriate processes in place to mitigate risk from things such as compliance or cybersecurity—is imperative.
However, even the best-run firms and funds are not perfectly insulated from risk. So, when a situation arises that creates the opportunity for reputational harm, it’s essential that you have a playbook ready. Here are three important points to keep in mind.
• Be transparent. Firms and funds should be upfront about problems and assume responsibility where and when needed. Trying to be coy or evasive simply undermines trust to an even larger degree.
• Create an action plan. Your plan should address the issue causing reputational harm and be communicated to investors, the media, company employees—anyone with a relevant interest. Explain how the plan solves the issue and prevents similar issues from occurring in the future. Scrutiny of such plans is often intense, so each plan must be carefully crafted. A plan perceived as insufficient can create additional reputational harm.
• Improve performance. Firms and funds coming out of a period of reputational harm will be under the microscope. Improving performance—and staying free from controversy—can help ease concerns and attract new investment or deals. In my experience, a well-performing fund or firm can lose any reputational taint much faster than one that struggles to deliver results.
In some cases, professional reputation management for private equity and hedge funds is recommended. While public relations professionals can help manage perceptions, funds and firms can also be served by partnering with a company that specializes in the field of reputation management.
When seeking a service provider, look for one that has the right experience and domain expertise to create a holistic solution for reputational risk suited to your company and situation, and that disseminates the solution via the proper channels.
When To Put Your Strategy In Place
It’s a common misconception that financial businesses only need reputation management when something negative has appeared in order to rebuild trust with current and potential investors or to reestablish themselves and their reputation. But I believe that reputation management should take place all the time, creating a strong presence and building a controlled situation to mitigate any potential negativity.
It’s important to take ownership of prime “digital real estate,” i.e., well-positioned space on search engine results pages. If these positions are kept secure with optimized SEO on appropriate, significant and high-ranking platforms, unwanted links will find it difficult to break through the barriers that have been created.
From maintaining regular coverage in target publication 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 running thread throughout any marketing strategy. When it comes to your reputation, if you’re already in control, you should never need to take back control.