Dialogue and transparency take centre stage
By A Paris – The fundraising environment over the course of 2020 was far from easy – the shift to remote working coupled with the uncertain outlook from an economic and a well-being point of view did not bode well for PE managers looking to raise capital. However, figures show activity in the space may not have taken such a hard hit. This may have been likely due to the proactive response of investor relations (IR) teams within the industry which sought to maintain dialogue with their clients and their broader network.
According to a report by EY, despite being a tumultuous year on most counts, fundraising activity within private equity appears to have remained robust. “Fundraising declined from last year, but remains in line with the preceding five years,” the report highlights.
Outlining the challenges of the shift to remote working, the report notes: “While recent studies suggest LPs and GPs are becoming increasingly comfortable with virtual due diligence and remote ways of working, there exist concerns around the impact to firms’ culture, the relevance of physical meetings and the criticality of face-to-face relationships.”
This difficulty is echoed by players in the industry. Edouard Boscher, COO for the investor relations department & head of sales France, Ardian, comments: “The relationships we cultivate with current and prospective investors are hugely reliant on face-to-face interactions, so learning how to maintain these virtually has been a challenge.”
In dealing with this change, services like investor relations have come to the fore. Cary Gibson, director and head of investor relations at Pemberton, notes: “The pandemic has increased the cadence and nature of the communication between GPs and LPs, and highlighted more than ever the importance of client service.”
Andrew Bernstein, Senior Managing Director, Head of Private Equity at Capital Dynamics agrees: “From an investor relations perspective, the frequency of contact with our investors has greatly increased, in both directions. Many investors have been reaching out to us with questions about the health of their investments and our expected timing of capital calls and distributions. We have been more communicative as well, holding periodic webinars, releasing white papers and generally providing more transparency.”
Firms that provide support services to the industry also attest to the rising value of a strong investor relations team. Sunibel Corporate Services writes: “A private equity fund with a well-established and effective investor relations team certainly has a clear competitive advantage. Investor relations’ ability to build strong relationships with investors and analysts, coupled with the strength of the executive team, are factors considered most critical to the success of these relationships globally.”
As market dynamics shift, so have the priorities of investor relations teams. Gibson outlines: “With the environment fluid and uncertain, LPs are more frequently looking to their GPs for more detailed information. We expanded our IR team in late 2019/early 2020 in an effort to continue to provide best-in-class client service alongside our growing LP base.
“The investment in our IR team alongside our BD team has been instrumental in providing enhanced reporting to LPs throughout the pandemic. Critically, this was also made possible by the size of our investment teams enabling us to have very frequent and detailed discussions with both the management and the sponsors of our portfolio companies throughout the year.”
From his perspective, Phil Nunes, Senior Vice President, BackBay Communications, observes: “The current environment has made the need for transparency more acute. At the same time, Covid has created some obvious obstacles in utilising more traditional venues through which to interact with investors, most notably the AGMs. To accommodate, GPs have adapted pretty seamlessly to digital channels to recreate these in-person events and in some cases make them even more dynamic, engaging, and user-friendly.”
Boscher details the constructive impetus the pandemic provided: “The way in which we accelerated our digitalisation programme due to the pandemic has been a positive development. We were already developing our online investor portal, however we were forced to progress with this more rapidly in order to ensure we could continue to keep in touch and deliver best-in-class service to our investors.”
Ardian invested in developing its own investor platform, something which is now becoming a trend. Boscher says: “There are an increasing number of parties developing their own platforms which can be made to be bespoke for smaller funds by allowing them to incorporate their own branding. These sorts of systems will make maintaining the GP/LP relationship more efficient for smaller funds navigating the shift to digital.”
The change has also led to teams providing their clients with new tools and services in their efforts to maintain dialogue and strengthen relationships throughout a challenging period.
Gibson gives an example: “We have always prided ourselves on providing proactive as opposed to reactive information to our LPs. One example is our proprietary traffic light reporting system. We issued our first report in February 2020, well ahead of our peers, and we have continued to refine and expand our analysis. We issued seven traffic light reports throughout 2020 and will be issuing our 8th iteration in late February. This level of information and transparency was extremely well-received by our investors.”
From its perspective, Ardian has also broadened its outreach format. Boscher elaborates: “We have been holding various webinars for existing as well as prospective investors as part of our efforts to adapt our investor relations efforts to the new way of working. These have focused on our investment activities, such as Buyout, Private Debt and Infrastructure, as well as wider business considerations such as ESG and sustainability. Our sales and investor relations teams have used the feedback generated from participants to more accurately identify which areas we can improve on.”
According to Glenn Engler, EY-Parthenon Global Digital Leader and Richard Bulkley, EY-Parthenon Partner: “The time has come for PE to embed a digital strategy throughout the deal cycle – from origination and due diligence, right through value creation and exit – as well as within the infrastructure of the firm itself.” In their view, “the pandemic has exposed organisations that lack strong digital capabilities, relegating them to the sidelines as their savvier competitors’ foresight delivers measurable business benefits and attractive returns for investors.”
However, even organisations which have embraced digitisation face challenges in terms of timelines, depending on the sector they work in.
Boscher at Ardian notes: “Because we operate close-ended funds, investor due diligence takes time. Pre-Covid, our IR teams would visit potential investors to present them with all the initial information they would need. After this, investors would visit Ardian’s offices to continue their due diligence, which was an operationally complex exercise that could last over a month.
“Now we have to carry out this process digitally, with videos from the relevant activity head replacing our initial presentations in order to maintain as much of the same rapport as possible.”
The provision of information is critical to maintaining and building on the GP-LP relationship. Gibson comments: “We have always been extremely transparent, and throughout 2020 we expanded our LP base with a number of new institutions across the globe, who together with external consultants, conducted their entire diligence process virtually. While there is no replacement for the value of an in-person meeting in building long term relationships, LPs and GPs have embraced conducting virtual IDD and ODD throughout the pandemic.”
A virtual future
Boscher muses over what things will look like post-pandemic: “We think a lot of these virtual processes will continue, especially factoring in climate considerations and the responsibility that we have as a large fund to prioritise our sustainability.
“More essential business travel will remain, however we have demonstrated that we can work differently and so it may be that many of the large events of the past, such as AGMs, will be held in a different format from now on.”
According to Nunes: “Going forward, the more sophisticated IR teams will likely embrace a hybrid approach for their annual meetings, where LPs will have the option to attend in person or via Zoom. And philosophically, many firms better recognise the value of consistent communication with their LPs. For instance, we’re seeing more interest from GPs to help create thought leadership and videos and then distribute that to key constituencies on a recurring and regular basis.”
In Bernstein’s view: “The increase in frequency of GP-LP contact and overall transparency is here to stay. These were trends that were already developing and have just been accelerated as a result of the pandemic. What will be interesting to see is whether virtual meetings become a permanent fixture. One element of the current process I hope does not become a trend is the creation of pre-recorded due diligence sessions. Certain GPs have embraced video technology to the extreme of pre-recording themselves, eliminating the opportunity to engage them in a two-way dialogue. Of course they still make themselves available for follow up meetings, but I find this methodology to be very impersonal for an industry that is all about relationships.”