Show them the systems

How many industries thrive where customers are not given what they want?
 
In the case of private equity, what the customers really want are good returns. And on average, LPs have gotten comparatively good returns over the past two decades.

But now it seems clear that the recent vintages of private equity funds will not on average impress anyone, and so the GPs need to make sure that, sans good returns, they are evidencing customer service in other areas.

If there’s a fly in your soup, you at least expect the waiter to put on a real show in apologising, reprimanding the chef, displaying the health inspection certificate and possibly offering free desert. You don’t expect him to shrug or dart out the door.

Likewise, LPs expect their GPs to analyse risk and profusely communicate. Investors are spending more time trying to determine whether their GPs, when not making gobs of profits, are sufficiently staffing and resourcing finance and administrative functions. The bigger the asset manager, the more is expected of them in these areas.

A profile on fund of funds giant HarbourVest Partners due in the September issue of sister publication Private Equity International includes a revealing remark from the firm’s chief financial officer, Martha Vorlicek. Noting the more detail-oriented due diligence now practiced by LPs, she says: “We’ve had a steady stream of our investors coming through our shop over the last eight to 12 months, focusing on operational due diligence. In the most extreme cases, they actually wanted to take a walk through the accounting department and count heads . . . they understandably want to reassure themselves that we are safeguarding their assets.”

Private Equity Manager has recently learned that HarbourVest as well as a handful of other large firms are seeking to become Statement on Auditing Standards (SAS) 70 compliant, an exhaustive, several-year process with a hefty price tag (PEM will be exploring the SAS 70 process in next week’s Weekly email). The move to SAS 70 is in response to LP requests that internal controls be thoroughly vetted.

LPs have a fly in their soup, and while they realize that these things happen from time to time, they’d like to make sure the kitchen practices the highest standards of hygiene.