Benjamin Franklin on Reciprocity

by Arbor Square Associates

Here’s a little anecdote that I read about how Benjamin Franklin won over a wealthy and influential member of the Pennsylvanian Assembly whom he had ‘crossed’ by securing a second term as Clerk of the Assembly, against this fellow’s proposed candidate.  The story makes me think of the relationship between private equity firms and intermediaries, and the importance of reciprocity.

Anyway, the story goes that Benjamin Franklin knew he needed to get this Assemblyman onside, but didn’t want to appear too servile, so asked him if he could borrow a ‘certain scarce and curious book’, which he knew this chap to have in his library.  The Assemblyman obliged, and had the book dispatched immediately to Franklin, who thanked him profusely by way of a note that ‘strongly expressed’ his ‘sense of favour’.  The next time the two men met, the Assemblyman spoke to Franklin warmly for the first time, and from then on they became great lifelong friends.  As a result of this encounter, Franklin coined the following proverb:

“He that has once done you a kindness will be more ready to do you another, than he whom you yourself have obliged.”

In times such as these, the reciprocity game in private equity is perhaps not as simple as tallying up sale mandates versus places at the table on new deals.  The equation is much more complex, often taking into account buy-side collaboration, joint origination initiatives and informal collaboration (or gossip!), much of which requires an investment of time often with no direct financial gain on either side.  That’s not to say these interchanges have no value.  Getting your advisory or private equity counterpart to ‘invest’ in the relationship can strengthen that relationship, increasing the likelihood of working together when opportunities do arise.

For instance, as a PE investment director, calling your sector counterpart at an advisory firm to tap into their expertise regarding a particular opportunity, even one which is unlikely to result in a fee any time soon, not only keeps you top of head when similar opportunities cross that advisor’s door, but also perhaps pre-disposes that advisor to ‘do you a kindness’ on their next mandate.

From the advisory perspective, having a private equity firm extend their loyalty and support during the ‘hard times’ – e.g. ‘creating’ fee-earning opportunities on the buy-side or introducing portfolio company audit and tax work – not only keeps the home fires burning, but perhaps encourages that private equity firm to continue to invest in the relationship when sales mandates are being awarded.

To sum up, psychologically speaking reciprocal exchanges build the relationship on both sides, whether or not you’re the one directly benefiting.  So a good relationship is a deeply collaborative one, based on an ongoing exchange of ideas, intelligence and ultimately mandates, on both sides.

Hazel Clapham, Arbor Square Associates