Buyout firms are not communicating enough about portfolio company performance and future deals, despite some having produced poor returns and angering investors with a tight-lipped approach, said several limited partners.
The private equity industry, celebrated during the boom for producing “super returns” by multiplying the value of companies they bought, has come under fire from irate LPs, who face poor returns from some deals done at the top of the cycle.
While communication from buyout houses has improved since the credit crisis, investors believe there could be more openness on portfolio performance and potential deals, said delegates at the SuperReturn private equity conference in Berlin last week.
“(Private equity firms) have improved, but I don’t think they are anywhere near where they should be in the level of disclosure,” said Erol Uzumeri, head of private equity at the
Ranking firms based on their communication with investors and the information they give could create peer pressure and provide an impetus for them to improve, Uzumeri added.
Firms recognize that LPs are anxious about performance.
“A lot of pain was experienced by the LP community in the last few years and there was a lot of concern [and] anger,” said
Investors, who once had to compete to get into the best funds, are now finding they call the shots as buyout firms attempt to secure their support for future fund-raisings.
While many firms have improved their reporting, some investors still want more information, particularly about what deals they are planning.
“What [private equity executives] don’t do on a regular basis … is tell me what they’re buying when they ask for a capital call,” said David Turner, head of private equity at The Guardian Life Insurance Company of America. “We’re bound by confidentiality, I’m not going to tell anyone.”
Investors need to hear more about the stability of the management team and any departures or new hires, said Rhonda Ryan, European head of the private funds group at PineBridge Investments.
“We need to know what happens at the [firm] when the door closes. We need to know how the partnership functions,” Ryan said.
The Institutional Limited Partners Association, which represents some 220 investors worldwide, has been vocal in calling for improvements in the way firms approach investors and the information they provide. Its recommendations provide a good template for how the industry should operate, investors say, and pave the way for a more open dialogue.
“If that’s too much for some [private equity firms], then they are not going to get our money,” Teachers’ Uzumeri said. —Simon Meads and Megan Davies, Reuters