Making it through the storm

When Superstorm Sandy wreaked havoc on the Eastern seaboard in late October many private equity firms were put to the test.

Fund managers in some of the hardest hit areas faced closed office buildings, power outages, unreliable mass transit systems and a general sense of uncertainty as to when things would return to normal. In New York City alone, arguably the industry’s epicentre, much of lower Manhattan was without power and disrupted subway lines left thousands of commuters unable to reach their offices.

Disaster Recovery Planning: Your lifesaver during the storm

Despite the severity of the storm however it seems private equity firms were well prepared for the disaster. Kohlberg Kravis Roberts, The Carlyle Group, The Blackstone Group and other firms contacted by PE Manager the day after the storm made landfall said that partners and employees were trained for such situations, and able to carry on their work duties remotely from home.

Mid-market firm The Riverside Company utilised the services of one of its portfolio companies, Emergency Communications Network, to keep employees updated and connected. They all received a text message providing instructions on how to access back-up systems from home.

Smartphones, high speed internet access, memory rich database systems and other technological advancements have made all this more possible. If needed, most GPs are able to communicate, manage assets and even transact on new business from the comfort of their living room.

“If the worst came to worst, we could probably all operate without an office for up to two months,” estimates Philip Shuttleworth, finance director of UK mid-market firm ECI.

Shuttleworth tells PEM that as a way of backing up data and emails, ECI has its servers at its London headquarters regularly communicate with its Manchester sister office. “We can instantly flip between servers from both offices,” says Shuttleworth. “So if there is a fire or flood in the server room in London, employees there can login to the Manchester server from any remote site with an internet connection to maintain full access to the entire ECI network.”

Communication with LPs is also important to think about. More GPs now make use of investor portals, many through a cloud-based platform. This allows GPs to communicate with LPs through virtual meeting rooms where they can upload relevant documents. Importantly such systems are typically accessible from anywhere with Wi-Fi connection, and less likely to be affected by natural disasters.

Equally significant is having plans in place for employees to group back together in person as soon as possible, says Barry Schwartz, founding partner of consultancy firm ACA Compliance Group, who adds firms have multiple options when identifying an offsite location if they cannot immediately return to their offices.

“A portfolio company can be considered a backup site, or a regional office. Other firms have made use of conference centres and local hotels as temporary solutions during disasters,” says Schwartz. But before moving the entire payroll to a crowded sister office or portfolio company, firms should first ask themselves which partners and employees are absolutely needed onsite in the first 24 hours, the first week, the first month and so on following a disaster and plan accordingly, he says.

PRACTICE MAKES PERFECT

Today’s technology and the best practices being developed clearly enable private equity firms to prepare for the worst. GPs just have to make use of it all.

At least once a year firms should test their disaster recovery and business continuity planning, says Schwartz. “And it need not all be at once,” he adds. “The first quarter can be reserved to test file servers, the next quarter can test employees’ access to remote networks.” A common mistake is to not test backup systems’ ability to handle all employees at once. “As firms grow, so should their network infrastructure.”

Sources stress that tailored instructions should be provided to staff based on their role, whether it is investor relations, compliance or any other function. During training sessions, employees should be given the opportunity to brainstorm and discuss what they would individually require in the event of a crisis.

That’s something that’s of increasing interest to limited partners as well as the US Securities and Exchange Commission’s examination staff, post-Sandy. “A selection of managers are being examined, with a focus on the investment advisor’s ability to conduct business at during and after the storm,” says Schwartz. “In addition to reviewing documents, examiners are interviewing each firm’s senior management, chief compliance officers, and employees responsible for alternative work sites, remote system access, investor communications, and training of other employees.”

All things considered some firms are simply more exposed to disaster scenarios than others. But every GP should at minimum be prepared to answer questions from LPs and regulators regarding what the plan of action is in the event of disaster. 

Unfortunately not all private equity firms are prepared for the worst. Below we illustrate the differences between a hypothetical GP that plans ahead, and one that doesn't:

Scenario: A virus corrupts the firm’s internal email system, allowing hackers to monitor sensitive emails sent and received by employees across multiple offices.

Smart Capital: The firm’s chief executive arranges a conference call with his general counsel and chief operating officer who together comprise the Disaster Recovery Committee. The three decide to activate a pre-planned “telephone tree” exercise that, much like a pyramid scheme, works by designating each employee three colleagues to phone in the event email systems have become corrupted or dysfunctional. Starting from the top, employees are told to use personal email accounts and telephones when communicating across offices. The firm’s chief technology officer immediately begins to investigate the infiltration.

Rue Capital: Upon becoming aware of the virus, partners attempt to contact one another in a haphazard manner through phone, email, or across desks if based in the same office. No one is quite sure what their expectations are, and so business is halted until a solution can be reached.

Scenario: An earthquake devastates the firm and its surrounding region. Power grids and local infrastructure are damaged by the impact.

Smart Capital: Generators provide uninterrupted power to the firm’s backup data center, which is stored some 100 miles from the firm’s headquarters. Employees have on their smartphones an app that works as an automated notification system controlled by senior management, who immediately send a URL address where stored files can be accessed. The app includes a catalogue of everyone’s emergency contact details, which can be seamlessly updated, and a number in which to report status updates.

Rue Capital: No centralised process allows staff to report their well-being to senior partners, leaving cause for concern over their health and safety. Employees become pessimistic about the firm’s future amid the crisis.