Brand as Leverage.
tl;dr: A differentiated value thesis for PE owners.
Obligatory AI slop image from the prompt - “an executive in a Brioni suit with Nascar livery.”
Recently, Benedict Johnson, Ian Whittaker, and Rory Sutherland published a great piece on brand for Private Equity (PE) owners over at Aha Partners. You should read it.
For the purposes of this Off Kilter, here’s the gist: brand is the psychological advantage that lets a business hold market preference, trust, and price. It’s among the largest assets private equity buyers pay for when they acquire businesses, but they treat it as a cost during the hold period, and then act surprised when its value hasn’t grown at exit. Whittaker’s explanation is that brand isn’t ignored, it’s unmodelled. The model PE owners use measures EBITDA impact this year, which leaves no room for a return occurring years into the future.
While it’s great, I wish they’d used their argument to make the case for a different kind of PE firm entirely. As a result, the rest of this edition is my attempt to build on their work and do that. Here are the load-bearing observations I’m building on:
What looks like financial discipline is a category error. Brand is not a line item waiting to be optimized. It is the option a business holds on being valuable in circumstances it cannot foresee. Optionality, not optimality.
Brand returns are fat-tailed, and a system that can’t model fat-tailed returns only sees variance rather than return.
In a PE firm, decisions that fail conventionally are survivable, while those that fail unconventionally are career-ending. Capital allocation inside these businesses is less a search for the highest probable return than a social system for mitigating institutional embarrassment.
Private Equity. Stuck in a trap of its own making.
Let’s begin by explaining why creating a different kind of private equity company is particularly relevant right now. (Please forgive any overly broad generalizations in the interests of clarity.)
Excluding the vulture funds and breakup specialists, PE has been broadly built on three engines of return, which emerged roughly sequentially as competition eroded the excess returns that preceded them:
Engine 1: financial engineering through cheap debt and the multiple on equity.
Engine 2: operational excellence. The hundred-day plan, the margin program, and the craft of running a business harder than its previous owner did.
Engine 3: the rollup, enhancing margins via market power.
Because each engine began by delivering excess returns, each attracted competing firms underwriting the same thesis, ultimately bidding against one another to pay more for businesses that would then return less. Competition-driven commoditization, exactly as theory predicts.
The Aha piece references this as a professional monoculture. I’d go further. It’s an epistemic monoculture with a singular worldview, in which everyone looks at the world in pretty much the same way. (Think of this as Ivy League averaging rather than AI averaging.)
The resulting numbers are stark. Distributions to investors have sat near financial-crisis lows for four straight years. Close to four trillion dollars of unrealized value is parked in more than thirty thousand unsold companies. These are assets owners are unwilling to sell at prices buyers are willing to pay. Yes, some of this is rate-cycle-driven, but the rate cycle is accelerant, not cause. The convergence driving lower returns is structural.
Want proof? Look at how the category’s own advisers describe value creation. Alvarez & Marsal’s 2024 value creation survey lists technology, AI, operational transformation, and organic growth as the primary levers. Brand doesn’t appear anywhere. KPMG’s 2025 value creation framework doesn’t include brand investment as a positive lever at all. In fact, the only time “brand” shows up in the KPMG report is as “brand erosion and cultural drag.” In other words, as a risk of cutting costs too aggressively.
So, coming full circle back to the Aha piece: the buyers paying rich goodwill premiums for the brands they buy don’t view the source of that premium as having anything to do with value creation.
What if we inverted this?
A 4th engine. Differentiated value.
If the trap is sameness, the way out is difference. Not a better mousetrap, but a completely different approach. Put more simply, a fourth engine of return. One with potential that others haven’t yet seen.
While there could easily be others, brand is one such engine. This is for three reasons:
At the operational level, brand strength is a powerful driver of differentiated value if treated as such.
At the capital level, the PE monoculture that exists today doesn’t value brand, which creates arbitrage opportunities for those who do.
At an epistemological level, brand centers on demand-side leverage rather than supply-side, which PE firms have already optimized.
What follows is an attempt to describe this opportunity in the language of a PE operator. I’m not claiming it as a complete thesis, but hopefully it’s enough to make the point.
Brand is market leverage, and what that leverage looks like is an options portfolio.
Here’s a different way of looking at it. Brand isn’t a single option on your future, as the article states. Instead, brand is a form of market leverage that manifests as a portfolio of options on future activities. The broader and deeper this options portfolio, the more valuable the brand.
When I say options, I mean it in the following sense:
A brand option means having the right, but not the obligation, to make a particular customer move in the future.
The premium for these options is hidden inside the goodwill you pay when buying a business.
The asset underlying these options is the accumulated customer permission the brand has built. This is trust that transfers forward to things the company hasn’t yet done.
Exercising a brand option means making a move that your brand’s permission supports. Whether that be a new price point, a new channel, entry into a new category, or even a new growth-inducing campaign.
Like any option, brand options expire. Cultural windows close. Adjacencies get occupied. Permission erodes when it sits unused.
This is a very different way of thinking compared to the current PE monoculture. Their supply-side mentality treats a portfolio of brand options as worthless relative to greater efficiency, whereas a market-leverage lens views these options as critical sources of differentiated value to be exploited through innovation.
The exploitation of differentiated value is manifest not in greater efficiency but in how brands de-risk innovation. The accumulated permission a brand has built increases the probability that a new move will be adopted and scaled successfully. It’s why Apple never has to be first. It enters late, lets competitors de-risk the category, make mistakes, and educate the market, then proceeds to suck up the majority of available profits. The options value of the Apple brand converts lateness from a penalty into an advantage, because people are willing to wait and then pay more for what they believe will be a more resolved solution.
Permission also has a shape. Apple runs deep into a single ecosystem, while Virgin runs broadly as an iconoclastic alternative to the status quo, irrespective of category.
This means the diligence question changes. No longer an abstract question of “how valuable is this brand,” but instead, “what does the brand’s permission look like, and how valuable are the options this unlocks for the future?”
Off Kilter 217: The Capstone-to-Advantage, based on Rita McGrath’s work, delves deeper into this. Under her theories, advantages are transient, so sustainable advantage depends on how well you manage a portfolio of opportunities (options) you launch, exploit, and then retire as their value expires. My addition is that the brand should be the capstone, or governance layer, directing the portfolio, because exercising options well earns more customer permission, which generates more valuable options. Managed successfully, this loop is why such businesses consistently outperform the competition.
This isn’t about seeking a precise mathematical value for the options created by your brand; it’s not a re-hash of “real options” theory. Instead, I’m using the term relative to a PE environment that values a brand’s value-creating potential at zero. You don’t need to price an option precisely to know that pricing it at zero is wrong; success only requires you to have an approximation that is less wrong.
Variance is where return lives.
Thinking this way allows us to shift Rory’s observation of fat-tailed returns from problem to desired mechanism, and to shift unconventional failure from embarrassment to strategic choice. The trick is to accept high variance in pursuit of asymmetrical returns while capping the cost of any individual failure, which is exactly what brand strength combined with operating discipline enables.
This works through three connected mechanisms:
Brand permission raises the odds. The accumulated permission increases the probability that any given bet, once exercised, will be successful.
Operating discipline caps the cost. Every option exercised is a market experiment with a pre-agreed budget and clear kill/scale criteria. The downside of any individual failure is bounded by design.
The portfolio supplies the ammunition. Across enough capped-cost bets, return asymmetry asserts itself. You don’t need every bet to pay off; you just need enough of them to.
Meanwhile, at the asset level, this adds up to something different: reduced risk. Whittaker makes this point from the equity research side. Strongly branded businesses trade at lower betas, achieve higher multiples, and recover faster from drawdowns. This is observable across two decades of market data.
So, the operating thesis of a differentiated value PE firm is this: high variance encouraged at the individual market-bet level; low beta delivered at the asset level. Brand investments reduce the house’s risk while increasing the odds of each wager.
By contrast, today’s PE monoculture looks at the fat-tailed profile of a single-brand bet and treats it as a high-variance cost to avoid, while failing to consider the asymmetrical upside. As a result, it far overstates the risk of building a brand while far understating the costs of not doing so. As proven by KPMG talking about brand erosion, without calling it what it really is, value destruction. Worse, this value destruction might even be booked as profit! Cut brand investments and liquidate your option value; meanwhile, the EBITDA calculation shows you created value. Grrr.
So, what might this look like in practice?
Any business exiting a conventional PE holding period has likely had its brand options portfolio degraded to somewhere around zero. Yet deep permission is durable. It can survive years, even decades, of indifferent ownership. So, where the consensus looks at a secondary buyout target and sees a tired asset that’s already been squeezed, the brand options-literate buyer might ask a different question: did the permission outlast the previous owner’s neglect?
Birkenstock is a great example of what’s possible through exactly this kind of rethinking. In February 2021, L Catterton and Financière Agache paid around four billion euros for a majority stake, and the PE commentariat’s reaction was entirely predictable: it’s a rich price for a sandal maker.
What the skeptics missed was that Birkenstock’s acquisition price included an undervalued portfolio of brand options. This included a price premium with room to widen, a wholesale-heavy channel mix with room for additional direct sales, and permission that ranged from high-fashion to category adjacency. What L Catterton did was exercise some of these brand options as value-creative moves, rather than “protect the brand” by doing nothing. Prices moved up and then held; direct-to-consumer sales were added. And collaborations were scaled from a novelty to a real engine of growth, through partnerships with Dior, Manolo Blahnik, and Rick Owens. Each of these moves represented a capped-cost experiment against brand permission and market leverage, which could easily be walked back if they failed. Meanwhile, each success expanded the aperture for the next.
Five years on, Birkenstock has achieved a rare success for a PE-owned firm, a liquidity event via IPO. It is now worth roughly double what it was bought for based on delivered earnings. Revenue grew 16% to over two billion dollars in fiscal 2025, earnings grew more than 80%, and management is confident enough in the trajectory that it’s buying back a quarter-billion dollars of its own stock. The exercised options converted directly to earnings.
Beyond Birkenstock and specifically outside of PE, there are powerful examples of adjacent innovation where value realization has been genuinely asymmetric. In January 2017, Liberty Media bought Formula One for $8 billion. Today, the Formula One Group trades somewhere around three times that. The standard story credits a commercial overhaul and the good fortune of a decade’s worth of sports-rights inflation. While both are true, they’re not enough on their own. Let’s, for a second, zoom in on the Netflix Drive to Survive documentary. This isn’t an ad in the classical sense. It’s media property innovation. A profit center that modernized the world’s perception of the sport while also making it relevant in the United States. The Formula One brand already had the option to become this character-driven entertainment franchise. That option remained unexercised until Liberty chose to exercise it. And by exercising it successfully, Liberty didn’t just increase some hand-wavy, academically derived value of an abstract asset called “the brand”; it directly increased the value of the entire franchise.
Red Bull built its entire contemporary success atop a similar thesis. After years spent marketing its energy drink through sports sponsorships, the brand earned the option to become a media and sports business itself. Red Bull exercised this option by purchasing Formula One teams and soccer clubs across three continents, as well as establishing a standalone media house to produce its own content. Exercising options in this way allowed Red Bull to do two things simultaneously. First, these sports and media assets became the advertising surface for Red Bull, paid for by their own economics, and far more impactful than any ad-buy alone. Simultaneously, the brand secured permission to successfully operate these assets in categories where values have been climbing faster than almost any other. The Ross-Arctos Sports Franchise Index shows that sports franchises across major leagues have returned something like thirteen percent annualized over two decades, outpacing nearly every other asset class. This means an energy drink bought its way into the era’s highest-performing asset class through a brand that earned the permission to do so, and then used that ownership to 10X the marketing surface area of the core drinks brand itself. Making money to make money. This may be one of the smartest business moves in decades.
While neither of these examples involves PE ownership, Liberty and Red Bull represent brand-as-options-portfolio thinking in action. Identifying brand options with asymmetric upside. Making staged bets on market leverage. Concentrating on winners and treating the brand itself as the edge.
The shape of the bet.
I’d be lying if I claimed this to be a fully worked-out thesis. I mean, I haven’t even mentioned hold periods (happy to if anyone really wants to dive down that hole). But the shape is clear enough. In a PE world where the conventional wisdom delivers ever-lower returns, there’s a bet out there for a new kind of firm focused on a very different worldview. One that sees brand value not as an abstract, lagging asset but as a portfolio of market-leverage options on the corporation’s future. Options with the capacity to unlock value that PE firms currently do not price.
The competitive advantage is that this can’t be bolted on. It isn’t about hiring a brand strategist, a creative director, a design-thinking innovator, or an over-the-hill CMO, and then wheeling them out like a novelty clown troupe downstream of a deal where all the big decisions were already made months ago by a very different group of operators, with a very different lens on success. Fully capturing the upside means having divergent thinkers with domain expertise who can embed a brand’s future directly into the investment thesis, with a vote on capital.
I mean, shit, if you’re going to be a PE firm creating differentiated value, you yourself must be differentiated. It’s a governance change far more than a hiring one. And because copying a differentiated worldview takes a monoculture far longer than copying a playbook does, this engine 4 advantage should hold up for longer than engines 1 through 3 did.
Show me the money.
Now, while all of what I’ve just said is nice and all, the real value isn’t about how well you’d manage brands as portfolios of options, or how you might fund ongoing brand innovation throughout your ownership. It’s how it changes the deals you’d choose to do, the diligence process you’d go through, and your ability to find hidden arbitrage.
If the PE field prices a brand’s option portfolio at or near zero, then it’s systematically mispricing any business with options that are large relative to its current earnings. You don’t need a precise valuation model to see this, because brand permission has clear signals. Pricing tolerance. Inbound collaboration demand. Adjacency fit. Online discourse. Fandom. The signals are there for anyone who knows what they’re looking for.
This strongly suggests that valuable arbitrage opportunities exist within the modern PE environment, because there’s no way a monocultural PE landscape has exhausted them all.
The differentiated-value thesis is a bet that valuable pockets of market leverage are currently attached to mispriced assets hidden in plain sight.
Maybe I’m wrong. Maybe I’m just thoroughly bored with the steadily diminishing returns of decades of efficiency dogma, but after 25 years in the brand business and having watched numerous PE firms blindly destroy forward-looking value without even realizing it, I’m confident the bet is good.
This is gold: "shit, if you’re going to be a PE firm creating differentiated value, you yourself must be differentiated."