When the economy is booming LPs are only too happy to hear from their GPs on a sporadic basis, but now LPs are demanding to hear first-hand what is going on.
Guy Hands recently stated how necessary it is for private equity firms to retain investor trust by being honest about losses, such as the 50% drop in EMI’s value since his firm Terra Firma bought it at the top of the market for €2.6bn in 2007.
So when you find yourself staring in the eyes of your anxious investor, here are some useful tips to bear in mind.
• Don’t be late
Etiquette is vital in an investor meeting and tardiness is a put-off from the beginning. There is little worse than a CEO arriving at the meeting half way through and repeating everything that has already been said.
• Don’t leave it to the placement agent
A placement agent’s prime role in an investor meeting is to show up. A lot of placement agents will try and put themselves between you and the investor. At a time where the internet offers such broad access to contact details, there is no need for a placement agent to be put in charge of setting up a meeting. Let them take care of the data and analysis.
• Don’t be overly friendly
Investors are not your friends. You can go out socially with an investor but you must remember that they are sizing you up. Getting drunk with an investor is fraught with danger because you are constantly being assessed. Investors are canny; they want to see you over dinner because it means they can test your intelligence over the course of a few hours.
• Know your investor
Know where the investor is coming from. If your LP has arrived from another time zone, they are going to be tired; they don’t want to be overwhelmed with detail. Make sure you are engaging with the investor, the worst result of a meeting is an investor falling asleep during your presentation.
You can’t help it if an investor is tired or has booked too many meetings but you must make sure to connect with them during the meeting/presentation.
• No surprises
You need to be honest and transparent. One of the worst things you can do is to tell an investor something that they didn’t already know. Investors hate to be caught off guard so you must anticipate their needs.
A good way of keeping investors informed is to use different platforms for communication. Many GPs are creating reports that are emailed to the investor as well as having conference calls to discuss the portfolio but nothing is better than a face-to-face meeting. In the current market, where valuations often do not reflect the progress on an individual company, investors want to meet with you in person to discuss what they already know.
• Don’t avoid the question
Some of the questions LPs are going to ask are: what companies are breaching their covenants? What is the debt/equity ratio of investments? What is the plan at fund level? What is the plan at portfolio level? Do you have a plan for each company? You need to be armed with knowledge. Investors are prepared for bad news but they need to know that you have a plan and that you have reserves if the fund goes down hill.
The market is down so they won’t have unrealistic expectations. As a GP you need to be honest and realise that investors want to hear the downside as well as the upside. They want to know their money is safe in your hands and don’t want to be fobbed off with irrelevant information. They are there to find out whether they can forget about their private equity allocation because it’s doing well, and if not, they want to know what needs to be done. You need to ascertain whether the question the investor is asking is a deal killer or not. If you don’t know the answer, explain that you don’t have that information to hand but you will get back to them.
• Don’t talk too much
Hemingway is better than Balzac. Always start a meeting by asking: How much time do you have? Most investors will say they have an hour so that gives you a cut-off of when you should stop talking.
• Don’t overwhelm them with detail
You want to ensure that you are reporting something meaningful. Your audience (the investor) is very busy so there must be validity in what you are saying. Communicate well and remember why you are there, in this market you are there to reassure them and manage their expectations.
• Don’t EVER lie
Lying is off the scale of taboos in an investor meeting. Any untruth will be revealed in due course. The relationship with an investor can last for up to 16 years, which is more than most marriages so it’s important to have trust.
The best thing you can say to an investor when they call you up about a fund that is struggling is to tell the truth. They appreciate it and lying won’t change the status of the fund. LPs have to answer to their own masters, so if you lie to them they end up looking incompetent to their superiors.
In the larger political sense, lying will also have a detrimental effect on the public’s image of the private equity industry. As the industry tries to prove to the EU commission that they can self-regulate, building a reputation based on misrepresentation will have a detrimental effect on the industry.
• Don’t over-delegate
It looks false and controlled. Life isn’t controlled so don’t try to control everything that is being said. With existing investors you should have two to three people in the meeting and most importantly ensure that the CEO is present. Don’t fob them off with a member of the investor relations team; it’s insulting to the investor as they want to see the person who is running the show.
• Don’t knock the opposition
The chances that the LP is involved with the competition are quite high. It also makes you look petty.
• Practise humility
You need a certain amount of humility in the current market. If you are bullish with investors, boasting about how well you are doing, you will be sure to take a fall. Explain that things are going well, so far. Make sure to explain what the management team is doing to ensure further success and what possible bumps lie ahead. Some GPs have been developing a bad name in recent months for acting arrogantly in meetings with investors. GPs need the goodwill of investors, particularly as investors are becoming more cash-strapped so will be making choices on the kinds of investments they want to make.
• Make sure your material is consistent
Don’t avoid spontaneity, a little dissent is good but make sure you are all singing from the same hymn sheet.
• Don’t lose your temper
You need to have a lot of patience in today’s market. If an investor is asking questions that you perceive to be inane or asking a question that you have already addressed, don’t get riled up. Remember who you are talking to. An investor is a customer that is vital to your business.
Some GPs have admitted to having blacklists of timewasters that they refuse to meet. It’s a good idea to keep a record of previous meetings, what was said, what the investor wanted to know so you won’t waste each others’ time.
One GP told EVCJ that he remembers attending an investor meeting with a Mormon investor. Every GP in the room was told not to swear or make any offensive remarks, and then, two minutes into the meeting, one of the GPs said in response to a question about investing in Europe, “if you’re not investing in Europe, you’re f*cked.” Needless to say the investor was not impressed.
• Don’t use your phone
Or Blackberry. There is no call, email or text message that is more important than getting money from your investor. Using your phone in an investor meeting gives the impression that the investor in front of you is not important. One GP told EVCJ a story of an investor who was all but committed and just wanted to meet a few more members of the management team. During the meeting, one of the managers took out his Blackberry and answered a call. “That investor signed up but to this day still talks about how rude it was,” said the GP.
• Don’t assume that you’ve got them
This goes back to humility. Even if you think you have presented a perfect presentation, remember who the decision-maker is.
• Listen to them
Very often LPs don’t know what they want from you so you need to say at the beginning of the meeting: “Ok, we have 45 minutes, what would you like to discuss”. The objective of the meeting needs to be clear. The meeting is an exchange, so you need to be receiving as well as transmitting.
• Finish on time
You can unsell as well as sell. Once you have delivered your message in a clear and concise fashion, end the meeting.