How covid-19 is changing private equity fund administration

The spread of covid-19 has ended up being the mother of all tests for business continuity planning for companies and firms across the world. Far from immune have been those providing services to the private funds industry.

Although there will undoubtedly have been headaches, perhaps the biggest surprise across the industry is that the transition has gone rather more smoothly than might have been expected. “Mobile working is not new to our business,” says Oliver Morris, global head of private equity at SANNE. “But that means we’re used to around 20 percent of employees working remotely at any one time – not 98 percent. However, the current situation has shown us that it is possible. Payments are still made, reporting deadlines met, etc.”

For some, the ability to soft test contingency plans helped smooth out potential wrinkles. “We are a globally dispersed organisation,” says Srikumar TE, global head of fund solutions at Apex. “So, we had experience of dealing with social distancing measures in Hong Kong and Shanghai as early as January, where we had to put offices into BCP.

“And while BCPs are usually drawn up to be local or zonal, we could see lockdowns were spreading; so we created rotational working from home in the early stages – that really helped test the effectiveness of our plans and systems before we had to shift 95 percent of the workforce out of the office.”

Many of the issues were, predictably, IT-related. “Some of the biggest challenges were around ensuring that everyone was using secure connections and that firewalls were in place,” says Srikumar TE. “Our ICT people had a lot of heavy lifting to do initially around security. We also did a training programme ahead of the shift around the tactics used in phishing attacks. This meant that this was fresh in employees’ minds. It has been worth it because there has been an increase in phishing attempts since home working began.”

Yet it wasn’t just IT security that needed a boost. “Our technology support teams needed to make sure that various platforms, such as banking and broking applications, could be accessed securely by those that required them,” he says.

Staying in contact

Keeping lines of communication open has been vital to ensuring clients’ needs can be met and information can keep flowing, and some valuable lessons have been learned from the financial crisis. “One of the biggest frustrations in the last crisis was that information was sometimes slow to emerge,” says Morris. “This time, the turnaround on questions is much quicker and our people can be available for calls at odd hours of the day or night.”

The development and widespread adoption of a variety of technology-based solutions has enabled a level of business resilience that just wouldn’t have been possible even a few years ago.

“Technology has totally changed the way we work,” says Laura Brunnen, partner at Reed Smith. “We’ve had agile working in place for a while and so we already had our home computers set up for working from home. It’s also worth bearing in mind that lawyers working on international deals all work remotely with each other in normal times – they’re used to conference calls and communicating with teams based in different locations.”

In fact, one of the most surprising aspects is how normal the current situation has come to feel.

“BCP has turned very quickly into BAU – business as usual,” says Ian Lynch, chief commercial officer at Intertrust. “We are definitely in BAU mode now. We have to make sure that we continue to grow the business even under unusual circumstances because this will likely go on for some time.”

For the fund administrators, there is, understandably, a significant demand from clients for a whole raft of information and analysis. “The main challenges for our clients currently are around their liquidity positions,” says Morris. “They are examining what their portfolio looks like – is there distress or are cashflows going to continue post-lockdown? They are also looking carefully at their LP base; and where funds need to issue capital calls, they are looking at whether LPs can meet them. They are looking at cashflow forecasts for the next nine months and asking, for example, ‘if there are no distributions, what does that do?’”

Valuation challenges

Although this information is largely accessible, what’s proving rather harder to work through – for market as opposed to operational reasons – is quarterly reporting. The wild swings in public markets and the rapid change in economic outlook brought about by the spread of the virus have made valuing assets with any accuracy an extremely challenging task.

“Valuations are an increasingly difficult issue and they are causing delays for auditor sign-off,” says Morris. “The December valuations were less of an issue, but it is going to be highly challenging to complete March sign-offs on time – there is a lot of head-scratching going on.”

“The main challenges for our clients currently are around their liquidity positions”
Oliver Morris, SANNE

Meanwhile, for lawyers, there are other considerations as clients work around the current situation to keep fundraising and deals as close to on track as possible. “We continue to be incredibly busy,” says a partner at an international law firm. “That’s a combination of work in progress that started before the current situation and new work stemming from clients seeking to plug funding gaps and addressing issues in their portfolio companies.”

The partner also points to issues around fundraising: “We’re working with a client that is raising several billion dollars in aggregate. They have extended their timeframe for doing this and it’s a challenge trying to close billions of dollars in fundraising from a laptop at home.”

One of the issues is signatures. Although e-signatures are relatively straightforward to arrange for deals, the complexity and multi-jurisdictional nature of fundraising can present
problems.

“The UK parliament, for example, has legislated to allow for e-signatures,” the partner explains. “Yet that’s not the case in all jurisdictions. That means there’s quite a bit of due diligence required to ensure contracts are effective and binding.”

Brunnen is similarly busy. “We’re still doing pitches and deals are still coming in,” she says. “I’m currently working on a joint venture and on an acquisition. Over the Easter weekend, we had a huge team working on a pre-pack administration – that involved video links with clients, the debt providers, lawyers working to the administrators and multiple teams on our side, from employment right through to real estate specialists.”

The path ahead

The fact the industry and its service providers have managed to pivot so quickly in highly unusual times is clearly encouraging. Yet it does beg the question of whether we may see more permanent shifts emerge from today’s crisis.

“Until now, there had been some resistance in some quarters to staff working from home, but I think this will become more regularised,” says Brunnen. “When senior managers and partners go through the numbers at some point in the future and see that work carried on while costs reduced, it will be an eye-opener.

“Many businesses could conclude that they can reduce their floorspace quite dramatically. I’m not sure we’ll go back to the old normal – I think a new normal will be created.”

The relationship between funds and their service providers may well evolve too. “I think we’ll see greater fungibility between clients and service providers,” says Lynch. “There may be specific services where we might, for example, lend our teams to clients. There will also be an acceleration of the maturing of operating models so that more firms have all the data they need at their fingertips in a standardised format, from fund right through to portfolio company level in granular detail – fund administrators will increasingly be called on to assist with this.”

Proskauer partner Leith Moghli agrees. “The GP-lawyer relationship will be closer as a result of this crisis,” he says. “We are going through additional challenges together and it’s at times like these that you find out who your valued and trusted partners and counterparties are.”

Indeed, those that have managed to stay on the front foot through today’s upheaval may be well positioned to benefit over the long term.

“The fact that we’re now operating as business as usual presents quite a big opportunity,” says Srikumar TE. “That has driven a lot of enquiries from GPs over the past few weeks.”

A slower period for private equity?

While private equity fundraising figures for Q1 2020 show a strong start to the year, with $124 billion raised across 184 vehicles – the highest first quarter total since 2017, according to Private Equity International – the expectations are that the coming period’s figures will show a slowdown as many GPs stretch timelines for capital raising.

For many of those raising as the lockdowns started to take effect, fund administrators acted as a linchpin for communications. “We were there to connect networks for firms raising and deploying capital,” says Doug Hart, CEO at Alter Domus. “We were a central aggregation point for closing activities to get everyone on the same schedule.”

And while fundraising may continue – albeit at slower rates than usual – new deals will likely see a sharper drop-off as private equity houses work to stabilise existing portfolio companies and wait to see how business valuations shake out once the dust has settled somewhat. Indeed, Hart reports his company is administering “fewer capital calls as a result of lower investment levels”.

And even if all parties can agree on valuations and investments can get over the line, there may be some delays during the process. In the UK, one issue, for example, is creating newcos, says Reed Smith’s Brunnen. “You used to be able to do this very quickly online, but that’s no longer possible,” she explains. “The lead time has increased on this and on some searches, plus there are practical points around signatures and certification, so there are a few wrinkles you have to work through. That said, in many respects, our work is business as usual.”