Strategic Communication is Imperative for the Success of Private Equity Minority Investments

Strategic Communication is Imperative for the Success of Private Equity Minority Investments | Brunswick Group

Financial investors are increasingly re-entering the M&A market, prioritizing strategic investments like minority stakes in family businesses or in spun-off corporate divisions.

The following key legal questions must be answered for successful investments: How should the investment be structured, already with a view to a future exit? And how can secure exit routes be designed? How are information, control, co-decision, and veto rights best stipulated? Strategic, tailor-made communication is equally important for the success of such minority investments. In that regard, three types of investments can be distinguished – besides long-term minority stakes in stable cash flow investments (e.g., media rights) – each requiring different communication approaches for the positioning of the transaction and the steps towards a future exit.

Impetus for Family Businesses

The first type of investment is the classic minority stake of financial investors in an independent privately held or publicly listed company. In private companies, private equity typically acquires shares from the existing family members or (additionally) through a capital increase. For example, in March 2023, BDT Capital Partners acquired a significant minority position in high-tech company Exyte, with Stumpf Group remaining the majority owner. In publicly listed companies with a majority family stake, financial investors acquire shares through public takeover bids. Notable examples include KKR’s minority investments in the Bremen-based, family-owned space company OHB or in Axel Springer Verlag.

These public investment cases often share common triggers: undervaluation of the company through the capital markets, limited visibility of business potential by public investors, difficultly to secure growth or transformation financing, and a lack of strategic guidance by public funds and free-float shareholders. Accordingly, the financial investor should be positioned as a strategic partner that effectively advances the company and challenges the management to think and act in the best interest of all parties involved. The majority family shareholders are expected to benefit from the projected long-term value increase, and the previous minority shareholders – as often communicated – from an immediate and risk-free exit compensation with a premium above the current stock market price.

Support for Spun-Off Corporate Divisions

The second type involves financial investors’ participation in corporate divisions. Prominent examples include Advent’s 30% stake in Aareon in 2020, the IT subsidiary of the listed Aareal Bank, or KKR’s strategic minority stake in the supply chain software business of the Körber Group in 2022.

Communication for spun-off units of public companies is generally three-fold: (1) emphasizing the near-autonomy of the target business unit, (2) highlighting value enhancement for the company while championing continued synergies within the remaining corporate group, and (3) showcasing heightened growth prospects through the financial strength, (management) know-how, and network of the financial investor. It’s essential to explain the advantages for all stakeholders that come with selling part of the company to financial investors, who have high-return targets. This can be challenging due to the risks involved for the company and its stakeholders.

Preparing for an IPO

The third type of private equity minority investment presents a unique case and differs from the previous two: a pre-IPO investment. This case involves an investment aimed at preparing a company for an IPO alongside the existing (family) majority shareholder. The objective is typically to professionalize and internationalize internal structures, such as introducing global risk management and compliance systems, securing supply chain resilience amidst geopolitical crises, transitioning to IFRS accounting standards, and adhering to international sustainability reporting standards. The aim is also to tap into new management networks and financing for M&A projects. Notable examples include EQT’s 20% stake in HealthTech company Ottobock in 2017 or CVC’s 2019 investment in Messer Industries as part of a joint venture. In both cases, an IPO has not yet occurred, and the financial investors have been bought out through financings by credit funds (Ottobock) or through participation of the Singapore state fund GIC (Messer).

Communication is the basis for reputation building

The common denominator of these three types of investments is that the success of a minority investment requires all partners to consistently communicate the strategic rationale and the objectives to complete a transaction. It is particularly challenging to anticipate the exit of the investor from the onset and to not communicate anything that could hinder the exit path. There is no one-size-fits-all approach for investment cases, instead a tailor-made approach must be pursued that addresses the specifics of each case and its stakeholders. Before any communication takes place, the parties involved, especially the investor, must align on their expectations regarding the holding period, milestones, and exit routes. This determines the main communication goals for all relevant stakeholder groups. These core points, along with a unified communication strategy, must then be bindingly documented in the investment agreement of the partners.

It is important to understand that it is not just about a one-time communication at the entry, but about accompanying the entirety of the investment period with a comprehensive communications campaign. Overall, the challenge is not only to communicate the success of the minority stake but also the continued value creation potential for future (minority) shareholders. Communication is critical to build and maintain a positive reputation among all stakeholders and, if poorly executed, can be the basis for civil and criminal liability.

The Authors

Prof. Dr. Christoph H. Seibt is a Partner at the law firm Freshfields Bruckhaus Deringer, specializing in corporate law and M&A, and an honorary professor at Bucerius Law School. Felix Morlock is a Partner at the strategic communications consultancy Brunswick, specializing in M&A and complex capital market issues.