In the face of widespread disruption and major upheaval to all aspects of work and personal life, the most important task for private equity managers has been to communicate clearly and consistently with their investors.      

It is almost undeniable that frank, regular and transparent communication is a necessity for investors, especially in times of crisis. But what are they talking about and what do they want to know? Real Deals held a webinar earlier this month with IPEM and discussed just this.

The webinar provided practical guidance on how GPs can manage their investor communication efforts, based on insights from LPs, gatekeepers and IR professionals. It also considered best practice overall, looking at how to navigate the current market environment and maintain a stable portfolio.

Cash calls 

It is clear that fund managers will have two key priorities during this time, maintaining and monitoring their portfolio and keeping their investors in the loop, especially when it comes to capital needs.

When discussing how GPs are coping with the crisis, Neurberger Berman head of European PE Joana Scaff noted that: “Fortunately PE investors, this time around, have a larger proportion of institutional loans used in buyouts that are cov light. As much as 70-85% in the last five years’ issuances have been cov light. This will enable PE flexibility to navigate the current cycle.”

Speakers were in agreement that managers are being proactive about potential capital calls. It is inevitable that during times of market uncertainty, some businesses will require additional funding in order to survive mostly unscathed. And so, it is crucial for GPs to keep their LPs informed of possible requirements.

Charterhouse IR partner Gilles Collombin said: “We are trying to give our LPs as much visibility as we can about a potential capital call because every LP needs enough advance notice and to have a good view of what their cash flow requirements may look like until the end of the year.” 

Where possible, however, companies are taking significant action in terms of cost cutting and capital spending cancellations or postponement in order to mitigate the negative impact of near or medium term demand and revenue compression, Scaff highlighted.

“It is absolutely crucial for our portfolio companies to preserve cash,” she added.

Near and far 

Investors also concurred that successful managers and investors at present are assessing and communicating the potential near and longer term impact that the current crisis will have on portfolio performance.

Considering how investments are being monitored, Alaska Permanent Fund Corporation senior portfolio manager Yup Kim explained that he is working to highlight the low, moderate and severe impact for portfolio companies.  

He said: “There’s a lot of rare opportunities today. I think it’s important to distinguish those companies that have had short-term hits, but also try to figure out which will suffer long-term declines versus quick recoveries. Short term spikes versus long term returns.”

Similarly Scaff said: “We are very much in active dialogue and contact with our PE partners. We are looking at the impact of Covid-19 on portfolios both near term and longer term. Some businesses have an immediate direct impact and some have later impacts and we’re looking to understand that.”

Playing offence 

The overarching call from the webinar was that fund managers need to start looking beyond the immediate impact of the Covid-19 crisis and prepare to play offence. While the first few weeks of the pandemic largely involved short term contingency planning and business safeguarding, there is now a need for a longer term view.

Kim said: “Most GPs have been very quick to tell investors that they are 
playing good defence, they also need to show how they plan on playing good offence on the M&A front.” Fund managers that have a more forward-looking approach and are able to identify the less obvious challenges to arise from a global market dislocation, are going to be able to better differentiate themselves.

It was agreed that companies in a relatively stronger position are now preparing to act offensively as well as defensively. Where assets will likely be held for longer and exits more of a rarity, Collombin highlighted that a favourable route could be adopting a buy and build strategy to support existing companies.

Kim noted that managers who are playing offence as well as defence with their portfolios better inform the decisions of their respective LPs.

“All GPs are thoughtfully conveying how they’re going to play good defence, cash and liquidity management, production etc, but those that are differentiating themselves are those that are preparing for good offence on the M&A front too… those that are doing both help us to inform our own pipeline and where we should be focusing,” Kim said.

Scaff agreed that a shift to an offensive strategy is imminent. “That will be through considering how we can help with providing liquidity to good businesses, because there are many good businesses that frankly will have liquidity issues and are going through turbulent times. So we will look to help those while earning a good risk adjusted return for our investors.”