If you were to run a periodicals search linking the phrases 'venture capital' and 'brand,' you would find a score of recent articles in the popular press on the phenomenon. This result is in itself significant. Not that long ago, the private equity industry was an obscure one, covered by only a few limited-circulation trade publications. Now it is undeniable that private equity in general, and venture capital in particular, have entered the public consciousness. Public recognition alone, however, does not explain why brands have become so important. The explanation can also be found in several other significant trends:
For many years it was extremely difficult for new private equity groups to obtain funding. With the surge in new capital coming into private equity over the past few years and the quick returns made possible by the Internet revolution, a number of new groups have not only obtained funding but have been able to establish a high level of name recognition in a very short timeframe.
Until recently, almost all funds had a 20 per cent carried interest, except for a few of the oldest names in the industry that retained a 25 per cent or 30 per cent carried interest under their 'grandfather' status. Now there is a small but growing 'club' of funds that can demand a higher carried interest. Entrance into this club is generally presumed to depend on performance, but the names within the club are also familiar. For groups aspiring to enter this club, strong name recognition certainly cannot hurt.
Many private equity firms have successfully completed, or are in the process of navigating a transition in firm management from the founding partners to the second generation. The importance of enterprise branding increases as firms rely less on the personalities of the founders to establish a presence in their markets.
Venture capitalists and other private equity fund managers have always sold themselves as being more than a source of capital. They provide key 'value-added' services, such as strategic advice, introductions, help with recruiting, and so on. Over the past few years, angel groups and incubators have sprung up to serve as alternative sources of capital, while making many of the same 'value-added' claims. If private capital is becoming more of a commodity, a recognizable brand name is one way for a private equity group to win the best deals.
Once upon a time, financial players stayed within their markets: venture capitalists did venture capital; buyout groups did buyouts; and hedge fund managers pursued any number of investment strategies, but generally within the public markets. Now, many of the original venture capital funds have grown to a size that allows them to regularly invest in management buyout and restructuring transactions historically done by buyout funds. Meanwhile, the buyout funds are trying to get into the technology space traditionally dominated by venture funds, either through affiliations or though their own internal venture programs. Similarly, private equity groups are starting their own public stock hedge funds, and the mutual fund industry has made some forays into the private equity world. Just as companies that once sold only athletic shoes can now also sell perfume on the strength of their brands, many private equity groups are looking for 'brand extension' opportunities.
All of the discussion of 'branding' of private equity funds, therefore, makes sense in the context of the current environment. As the awareness of private equity has grown, so has the need for fund managers to protect their 'trademarks.' Historically, brands were created to identify a company's goods and services in the marketplace. Trademark law was developed to protect the owner of the mark against attempts to steal its customers through the use of similar marks that create confusion in the mind of the public. Until recently, the private equity world was so small and self-contained that there was no risk of confusion. That is no longer true. The value of brands and the importance of protecting them has never been greater.
This article is reproduced with permission of Testa, Hurwitz & Thibeault, LLP. For more information about Testa, Hurwitz & Thibeault, LLP, please contact www.tht.com
