Daniel Forbes

Daniel Forbes: How media attention shapes investment

Tuesday, May 19, 2020

When a private equity firm wants to launch a new fund, they turn to investors.

But anyone parting with their money is going to want proof that they can get a return on their investment. For PE firms with a track record of managing funds well, this likely isn’t difficult. But what about those just starting out that lack a historical record of success?

New research by Carlson School Associate Professor Daniel Forbes indicates there is a way for such firms to improve their chances: Get media coverage.

“Sometimes attention can really do wonders,” Forbes says.

Realized vs. Unrealized Performance

PE firms are fairly straight-forward businesses: They take money from investors with the promise that they will invest in companies, improve their performance, and then sell them at a profit.

However, the process of acquiring capital, buying up companies, and making them more profitable can take years. In the meantime, the PE firm might decide they want to launch another fund. Those that have already started to exit companies can provide their “realized performance” to potential investors—essentially the profit they were able to make from a given company, showing that they are indeed successful. But for those that have not, the only numbers they can give are projections or predictions of future sale prices. This is called “unrealized performance,” and it’s generally considered less reliable. Firms with realized performance find it easier to get money with investments, they found.

“It’s the difference between someone who flips houses saying, ‘I can buy this house, fix it up, and sell it for this much, and here’s all the other houses I’ve done this with as proof,’ and then someone who’s new to the flipping game saying, ‘Well, this is how much I think I can get based on a Zillow estimate,’” Forbes says. “You’ll likely be more convinced by the first person.”

But Forbes and his fellow researchers Tom Vanacker, Mirjam Knockaert and Sophie Manigart, turned up something interesting: If a firm with unrealized performance was able to attract media attention, the mere fact that they had a metaphorical spotlight shining on them made them significantly more likely to be able to get investor’s cash.

However, media coverage had little or no impact on firms who were able to show realized gains.

Media coverage fills the gap

Forbes says this suggests that media attention provides legitimacy to firms whose performance might otherwise be called into question. This could be because investors see coverage as a form of vetting by a trusted third party. Meanwhile, those with realized performance can let the results speak for themselves.

“ Sometimes attention can really do wonders. ”

Daniel Forbes

The study, published in the Academy of Management Journal, focused on private equity firms, but Forbes says there may also be lessons for other types of companies seeking funding, such as an entrepreneur seeking startup cash.

He adds that it provides takeaways for both sides of an investment transaction.

Those seeking investments, especially those who don’t have a long track record of success, should do everything they can to attract media attention.

For investors, Forbes says there’s reason to stop and consider what might be attracting them to a particular investment. “They should be aware that their judgments are likely influenced by the media environment,” he says. “So they should proceed with that in mind.”

Spring 2020 Discovery magazine cover

This article appeared in the Spring 2020 Discovery magazine

In this issue of Discovery at Carlson, you’ll read about how emerging countries handle the demand for vaccines and why we make different decisions during a presidential election year to the long-lasting impact of a CEO’s cultural heritage and a study supporting quarterly earnings reports, among other topics.

Spring 2020 table of contents