Top tips for soothing LPs

In distressed economic times such as these, maintaining relationships with investors is a key component for every firm. Fostering confidence among LPs and fully utilising your resources is more important than ever, and with that in mind, PEI Manager assembled four key industry players – Mark Barnhill, principal at Platinum Equity; Nicholas Mead, director of investor relations for The Sentient Group; James Rutherfurd, managing director for Veronis Suhler Stevenson; and Spencer Timm, investor relations partner at Morgenthaler – as part of its upcoming 2009 Investor Relations and Communications Forum in New York.

While each firm has its own approach, tailoring communications for specific clients, several common themes emerged from a pre-event discussion among the four about what to consider when trying to anchor relationships in a difficult environment:

Be proactive
Most firms’ IR people are dealing with a fair degree of additional volume, as worried investors seek greater levels of detail than before. At this point they have likely heard from enough LPs to be able to gauge what are their main concerns. One panelist said that after receiving two calls late last year when the market was beginning its dive, his firm decided to get more proactive and begin anticipating where it expected the future calls would be coming from.

At this point most LPs mainly want more detailed information on portfolio company performance and valuations, as well as expected drawdowns, potential distributions going forward and upcoming capital calls. Knowing this, firms should try to get ahead of the curve and have all the right materials in place before their LPs even request them. At the same time, firms shouldn’t give LPs forward-looking information unless they can be certain of its accuracy – sometimes you have to tell your LPs you don’t have a crystal ball.

“We’re looking at trying to anticipate what the questions are, what the concerns or hot buttons are, and get to the investors first before they start asking about them,” Barnhill said.

Keep it personal
When giving updates to investors it is obviously important to give them as much market information as they need, including what deals you are seeing, what the overall condition of the market is like, what is going on with lenders, how deals are priced right now, etc. But don’t just talk about data: strong relationships and good communication are going to get you through the difficult periods that are inevitable in the lifecycle of any fund.

So small talk about children, vacation homes and favourite sports teams can be just as important as detailed information about how the fund is doing. One panelist said that he often has conversations with investors where he doesn’t mention the fund at all, and while on a recent road show planned to visit an LP’s place to watch a Mets game. Timm said that lunches and dinners are a good time to spend with LPs, and tries to make such appointments with investors wherever he is.

“The most valuable information you will have is personal information about your investors,” he added. “It will be through that that you will tie them to you over longer periods of time. If [an investor] has to choose between two GPs that are very similar, the one they are going to go with is the one where they have good personal contacts.”

Road trips are good, but not vital
Several investors and advisory firms have said they have seen more GPs getting on the road to meet with existing LPs, with the panelists agreeing that road shows are a good idea even between fundraising cycles to give investors a picture beyond what they see at annual meetings or quarterly reports. Senior GPs who have gone through several economic downturns are also an asset as they can help reassure investors that the sky is not falling.

However, some of the same LPs that like being able to meet face-to-face with their investment manager acknowledge that such trips can take valuable time away from GPs who are also trying to focus on making deals. In many cases a short conference call is just as appreciated, especially as these LPs are pressed for time as well. And with so many highly detailed information requests requiring faster response times, phone calls allow you to reach more people faster. No matter how it’s done, what’s important is maintaining contact and making investors feel that they are plugged in.

“At the moment many of the LPs are more than happy to receive a phone call and to get a quick blurb on how things are going,” Mead said.

Learn from your fundraising
Firms that have raised even just a single fund can learn valuable things about their investors that can be useful during non-fundraising periods, such as which LPs want to know everything to the third decimal point and which keep forgetting how much they have actually committed. This will help you know exactly what documents they want before the next fundraising begins and what questions they are going to come back with. The kind of personal information you glean during fundraising also helps you know how to approach them and whether they are the kind of investor that wants a long detailed analysis of every portfolio company or a quick update during lunch.

“During the fundraising process everything is very concentrated, and during a short period of time you understand the kind of person they are, what kind of institution they work for and their requirements,” Mead said.

Advance the story
As one panelist put it, issues like fees, succession planning, the scope of your investment process, the segments you are investing in, your philosophy and theories on where the market is going are all amplified during a down market, which means that investor relations professionals need to make sure that the GPs are all telling the same story. Another panelist added that even a routine communication like an annual report is designed to continue to advance the story of who the firm is, what it does, how it creates value, how it is different from its competitors and why investors should be comfortable with them.

“The essential storyline, the essential ability to define where you fit in the world in terms of being an investment product that you want to be differentiated and attractive to them to make a decision, that’s part of the conversation every single day,” he said.

This also requires more coaching for many GPs and deal makers, who may be good at making money but who may also create more questions than answers when put in front of investors. There should be a specific reason for having a GP talk with investors, and before giving the GP a bigger role, IR professionals should put them through some sort of training on forming soundbites about deals they are working on. If they are going to be a face for the firm they should be seen in the best light.

Don’t be complacent
What is different about communications between fundraising cycles? Nothing, according to most of the panelists. “Capital raising is not a point-to-point exercise that exists separate from day-to-day investors relations,” Barnhill said.

Timm added that he believes the industry is moving toward an investment management model, which is built around marketing and sales, constant contact and information flow and a non-stop search for new investors. In effect firms should always be fundraising, as the last year or so has taught many that the people who GPs considered their most stable and secure investors can disappear quite suddenly.

“There are no investors you can take for granted anymore, so you have to constantly be meeting with everyone,” Rutherfurd said.

Prepare for the hard call
Finally, although the worst is hopefully in the rearview mirror, the current economic environment – and subsequent issues such as liquidity pressures on LPs – forces GPs to face the possibility of having to make tough decisions on how to deal with possible defaults. Although it’s not something either side ever thinks about having to deal with when they form a relationship, firms better be prepared to deal with them fast because such issues become problems right away.