PEF: Transparency is a matter of survival for smaller firms

Investor confidence has been shaken by the pandemic-induced market turmoil, and all eyes are on the finance function for clarity and assurance, PEF Services president and chief executive Anne Anquillare said in a recent webcast hosted by the Small Business Investor Alliance. She shared several tips for getting ahead of investors’ expectations on transparency and re-gaining some of that confidence.

“You are going to be judged by your actions of 2020 – it’s really a crossroad for our entire industry right now,” she said. Especially for smaller firms (Anquillare singled out firms with $5 billion in assets under management and less), tackling transparency may be an existential issue. Loss of confidence could lead to large-scale capital consolidation favoring the most established players.

“We’re becoming an industry of haves and have nots,” Anquillare said. “That can’t happen. If that happens, we will not have a next generation of private equity to grow over the next 10 years, and that would be very detrimental for our industry.”

LPs have been asking for “more data, faster” in recent years, she said, but now, “they’re in a position to really push for it and they desperately need it to do their own jobs.”

Here are some of her tips for getting ahead on investor reporting and transparency.

Tip #1: Rolling 90-day capital projections

The goal, Anquillare said, is to implement a policy of “no surprises.”

To that end, GPs should be communicating 90-day minimum rolling capital activity projections in their quarterly reports. Finance should work with the deal teams to create scalable projections of the upcoming capital needs of portfolio companies and the timing of upcoming deals. Projection of subscription credit line drawdowns and clean-downs should also be included.

Providing forecasts to investors will help “balance their illiquid and liquid assets so they have a reasonable time to plan for their capital call,” said Anquillare.

Communicate that these projections are just that – projections. They are subject to change. But giving them gives investors better clarity on the big picture.

Tip #2: Stay ‘in front’ of investors, even prospective ones

Anquillare suggested that GPs consider holding quarterly investor calls, as is often done in public markets. But even if not, they need to be communicating to investors regularly, even if they aren’t fundraising.

“GPs need to be communicating to existing investors as to what exactly is happening, even if you’re not in the fundraising process,” Anquillare said. “Let investors know what you’re doing and how you’re doing.”

Staying in front of prospective investors – again, even if you’re not fundraising – is also crucial, she said.

GPs should consider giving prospective investors partial access to their investor portal and including them on some communications distributed to existing investors.

Existing investors may need their funded and unfunded balances at any time, Anquillare said, so GPs should be sure to have them ready.

Anquillare reminded GPs that June 30 financials and partners’ capital account statements will be heavily reviewed by all investors this year. “The work you do in 2020 will be heavily scrutinized,” she said.

Tip #3: Take investors’ pulses

It’s not just about demonstrating your openness and consistency in communication to investors – it’s also about taking their pulse.

GPs should regularly ask investors about their positions, concerns and outlooks, said Anquillare. “Have there been any reach-outs with regards to [investors] thinking about doing a secondary? Are there any concerns about investor liquidity?”

“The time to find out if an investor is having a liquidity problem is not during a 10-day capital call window,” she added.

Should an investor miss a capital call, however, the first thing you want to do is reach out to the investor. Is it just a logistics problem? Or is the investor having liquidity issues?

Tip #4: Review documents, document everything

If an investor defaults, GPs need to do a thorough review of their partnership agreements and side letters. “Some partnership agreements now have notice requirements for defaulting partners, and that default is triggered by the number of days an investor is late,” Anquillare noted.

And documenting “everything you know” – including communications and reviews of documents – is all-important in the event of a default.

“This is something that is going to be scrutinized by your auditors, as well as regulators” and potentially may even be asked about in future fundraises, especially if the default was significant, Anquillare said.

Tip #5: Good or bad, get LPs your performance metrics

Providing LPs with performance metrics on a quarterly basis allows them to better manage liquidity, Anquillare said.

Disclosed metrics should include not just internal rate of return, but distributions to paid-in capital, residual value to paid-in capital and total value to paid-in capital.

GPs should use ILPA’s Portfolio Company Metrics Template to make liquidity at the portfolio-company level, she added. Available cash lines, burn rates, interest rate coverage and any commitments a fund has to a portfolio company are key.

“A tremendous amount of data is being held by PE firms, we’ve just got to get better at opening it up to investors,” said Anquillare.

Tip #6: You can’t ignore standards anymore

“If our asset class is going to become the major asset class that everyone is predicting, we really need to have a few things fall into place,” Anquillare said. Industry standards for disclosure, the widespread adoption of those standards and the development and utilization of scalable technological solutions are top priorities in that regard.

Private market professionals are used to dismissing the CFA Institute’s GIPS standards as not relevant to their market. “That excuse is gone,” said Anquillare. GIPS 2020 addresses the specific needs of certain private market asset classes, and can’t be ignored now.

“They’ve done tremendous work in tailoring it to our industry,” Anquillare said.

Other useful resources include the Institutional Limited Partners Association’s new guidance for reporting sub line disclosures, and the updated International Private Equity and Venture Capital Valuations guidelines.

While an ILPA poll in May suggested that some 60 percent of GPs are providing more information more frequently to investors, 57 percent of LPs said their biggest challenge is the inconsistency of that information. Standardization will be key to overcoming that challenge.

The good news is that the 2019 Global Alternative Fund survey from EY showed that there was a big increase in GPs that see enhanced investor reporting as a top-three priority, going from 11 percent in 2018 to 24 percent.

“We’re expecting an even bigger jump for 2020,” said Anquillare.