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GPs work to ease LP concerns, with communication ‘the best I’ve ever seen’

LPs have reported frequent and broad communication from GPs, who are keeping fund investors updated on the status of portfolio companies, vulnerable spots, and actions GPs are taking to defend investments.

Amid the catastrophe unfolding in global economies and health systems, there are spots shining all the brighter in the gathering darkness. 

In the private equity world, one of those bright spots is the communication between general partners and the limited partners who commit to PE funds. GP communication has often been a point of dissatisfaction among LPs, who generally want more, specific and easily digestible data from their managers. 

But in the current downturn, LPs have reported frequent and broad communication from GPs, who are keeping fund investors updated on the status of portfolio companies, vulnerable spots in funds, and actions GPs are taking to defend investments, sources told Buyouts in recent days. 

“Most GPs are doing a really good job of acknowledging the need to very closely monitor and follow what’s going on with portfolio companies and portfolio company debt levels and possible changes to EBITDA and profitability going forward,” said Brian Murphy, managing director of Portfolio Advisors. 

“I would say the GP communications is the best I’ve ever seen,” said Trevor Williams, managing director and portfolio manager at Penn Mutual Asset Management. “I’ve been on call after call with managers communicating what actions they’re taking in portfolio companies, how their business operations are going to be altered by this.”

In part this is because quarterly reports have been rendered irrelevant by the sudden and shocking business downturn driven by the coronavirus pandemic. Performance marks for Dec. 31 are obsolete, and first-quarter marks won’t be out until April. 

With this sort of uncertainty, GPs have stepped into the information gap to keep investors apprised as much as possible of changing valuations and the status of portfolios, sources said. 

“GPs have had to take this in a few rounds of communications. They started reaching out quite early, but there was little they could say, they were just starting to dig into their portfolios,” said Scott Hart, co-chief executive officer of StepStone Group. “Given the speed of this outbreak, they’re coming back with rounds two and three of communication with more detail and impact on the business.” 

Communications in this situation break down across three categories: how the GP is operating itself; impacts on the portfolio; and opportunities GPs are seeing in the market, Hart said.

While it’s fairly easy to report on internal operations of GPs, the more challenging aspect is the impact of the outbreak on portfolio companies, he said. “It’s been a bit of a challenge trying to quantify the impact,” Hart said. “People are really focused on the financial impact on companies in March and into Q2; it’s difficult to project at this point in time.”

LPs, meanwhile, have all kinds of questions, sources said. Essentially they are concerned about the future of each private equity fund, among other things. “What’s going to happen with dry powder, are companies funded enough to withstand this slow period? There’s lots of questions that need to be answered and for the most part, the GPs we deal with have stepped up to the plate,” Williams said. 

Lessons learned

This idea of more open and transparent communication suggests that private equity firms learned lessons from the global financial crisis in 2008, when GPs were criticized for sparse communication with investors. 

After that, GP communication and reporting became a big issue for fund investors. Routine information includes annual and quarterly reports that touch on portfolio company valuation and fund information. 

Institutional Limited Partners Association even offered best practices for how GPs should talk to LPs. ILPA’s guidelines include disclosures about any inquiries by legal or regulatory agencies, material contingency or liability arising during the fund life and any breach of LPA provisions. 

But informal communication is up to the GP, and so far, many firms have been over-communicating, which in this environment is welcomed, sources said. 

Action Item: Check out ILPA guidelines here: https://bit.ly/2J8XsN0