The Power of Storytelling

by Arbor Square Associates

The human brain has a natural affinity with narrative – we are born storytellers. We constantly tell each other stories, matching and comparing new stories to those that are already stored in memory in order to understand one another. At a subconscious level, our brains are continually working to structure, simplify and order complex information into meaningful patterns, ironing out inconsistencies and conflicts in order to preserve the integrity of the emergent ‘story’. We tend to remember information much more easily when we encounter it within the context of a narrative framework than when we’re presented with a string of facts.

This cognitive quirk is of considerable value to private equity firms seeking to communicate their ‘model’ to prospective investors. We’re continually telling our clients how important it is to build a compelling narrative before a fundraising in order to have the best chance of getting their message across to LPs in those early meetings. Stories are also easy to remember, with the ‘gist’ of a good story remaining lodged in the memory long after the facts have started to fade. Embedding this narrative, therefore, has implications for reputation building and ‘word of mouth’ marketing. LPs talk to each other. An intuitive, well structured, compelling story is one they’re likely to share.

The private equity investment process naturally lends itself to a narrative structure. Just like a story, it has a beginning, middle and end – companies are sought, evaluated, backed, grown and exited. While this underlying process is a feature of all firms, the actual execution is where firms differentiate themselves, and therefore where the story gets really interesting.

Pitching one’s story to maximum effect is not as straightforward as it might sound. Each individual GP’s story exists within a broader narrative context, which to some extent is defined by the investors evaluating a fund. For instance, particular LPs might take comfort in certain structures and messages, which have become embedded in their over-arching private equity world-view. So the sensation of ‘recognition’ in the minds of an LP when a GP starts talking this language is sub-consciously comforting. However, when a GP comes along proposing something which seems to be at odds with this world-view they are in danger of ‘turning off’ that investor. While this is particularly the case with ‘innovative’ fund structures or non-standard T&Cs, it also applies more broadly. For example, ‘backing quality management’ or ‘a partnership approach’ are messages that became strongly associated with mid-market private equity over the past cycle. While messages such as these have led to a perceived lack of differentiation amongst mid-market firms, they have also perhaps served to get LPs nodding along with this as an ‘accepted’ way of doing things.

Arguably, this narrative context has undergone an almighty shift in the wake of the financial crisis, with investors recognising that the ‘old ways’ are not necessarily the best ways. The rise of ‘operationally focused’ private equity models is a case in point, as is the growing dichotomy between ‘growth buyout firms’ and ‘traditional private equity firms’. More than ever, now is a time to think hard about one’s ‘story’. Has it adapted to today’s reality? Do all the elements chime as they should? Getting this right could prove crucial in this market.

Hazel Clapham
Arbor Square Associates