Investors appreciate that GPs share an enormous amount of data on their investments these days. But LPs still need help finding that one stat for their own newly rigorous processes. So they reach out to the fund manager for some clarification, that extra detail, or even to ask them to fill out their own template. With a large and diverse investor base, GPs find these requests can swallow as much time as assembling the initial quarterly or annual report. And sometimes it’s not just portfolio company data but a capital call or a distribution notice that needs additional clarification.
Fund managers can’t rely on technology alone for every request an investor might make. The best web platforms give so much information that LPs can struggle to find exactly what they need. Or the standardized reports from these platforms can include stats that don’t accurately reflect the value of an investment. Firms would do well to build “smart-sheets” that track the most frequent follow-up requests. But in most cases, it still requires additional manpower to handle. In deciding whether to invest in a new technology or additional staff, GPs should examine the nature of their LP base.
In the rare instance that a GP doesn’t want to answer a request or share a certain detail, they do need to provide a rationale. In fact, that “no” might take more time explaining than simply including the data. The best way to decline a request is to manage expectations during the fundraising process, so that small investors in oversubscribed funds are aware not every request will be answered. However, there will always be those investors who commit enough capital that “no” simply isn’t an option.
For those high priority investors, there are still ways to standardize these extra requests.
There are a number of web-based reporting platforms that get high marks for helping minimize follow-up requests by allowing LPs to navigate through a wealth of data themselves. “We provide online access to real-time information via our online reporting tool,” says Matthew Herzog of Hamilton Lane. “Because there are numerous touch points where LPs can gain information on our investment activities, many questions are answered before a request is required.” But Herzog admits that even with the tool, LPs still ask for clarification of the data they’ve provided.
Some GPs have avoided the more elaborate online tools, using a simple web platform and building the reports manually. But that choice isn’t necessarily based on cost. “Our method ensures that the LP doesn’t just have all the data, but they have the full story,” says Jim Rutherfurd, an investor relations-focused managing director at Pine Brook.
Sometimes the one-report-fits-all-approach of web-based platforms requires data inputs that don’t make sense for an investment. “We build companies from scratch, so EBITDA isn’t a relevant metric per se,” says Matt Zales of the same firm. But any deviations in the reports need to not just be explained, but communicated.
“At a minimum there should be an explanation in the footnotes,” says Jennifer Choi, managing director of industry affairs for the Institutional Limited Partners Association (ILPA). “If something’s not applicable, there should be communication alongside that ‘n/a’ which explains that rationale, because footnotes are easy to overlook, and in reformatting documents they can be lost, and fall out of the document.” Choi suggests the deviation should be explained so that someone who isn’t the primary relationship manager with that GP can understand it.
Several firms have at least a point person to receive LP data requests and forward them to the party that is best equipped to handle it. Most note receipt of the request within 24 hours, and attempt to solve it within 48 hours, and no later than a week. In order to respond to it quickly, many GPs have begun to build spreadsheets that get “smarter” as time goes on.
“We keep a 12-tab spreadsheet, that adds categories when an LP will make a special request for a stat. If we think it’s something an LP may request again, we’ll track that for all our portfolio companies from that point forward,” says Zales. “So even though it’s labor intensive, it’s a way of making us that much quicker in responding.”
Pine Brook has a specific person dedicated to these requests, but smaller firms can at least keep a running log of requests and prepare answers as part of standard reporting procedures. And firms that lack manpower can tap certain service providers on an hourly basis to field these calls during reporting periods. Of course, this requires training and confidentiality agreements to be in place.
For GPs faced with filling out an investor’s entire template, similar types of LPs will have similar templates, so by recording the process for one template, you can duplicate it again. “For example, what works for one endowment, might work for others,” says Sunaina Sinha, managing partner of Cebile Capital, a placement agent and secondaries adviser. “This way you’re automating the process over time.”
Sometimes a GP might only have to do that once. Some mention that by taking the time to walk an investor through where to find each input for their template the first time, many fill it out themselves from that point forward. But what if the fund can’t afford both upgrading a web platform and an additional staff person to help field these requests?
“They should consider who the majority of their investors are and how those LPs are likely processing the data on their end,” says Choi. “Are they large organizations that take part in initiatives such as AltExchange or are they small organizations such as endowments or family offices that may take a less technology-centric approach?” In some cases, a more rudimentary web-based reporting platform is fine, if a team member is responsive to investor queries.
What if the GP would prefer not to answer a request or a fill in a particular line of that template? Because it might not be relevant to this investment, it may skew the overall picture of the investment. LPs are more than willing to take “no” for an answer, provided it’s explained.
“It’s all about communicating the rationale for not answering that question,” says Choi. And LPs are open to hearing that explanation. “When GPs refuse, it typically has to do with protecting the interests of the investment through either competitive and/or confidentiality concerns,” says Herzog. “More often than not, we find common ground. We’ve actually never had a GP flat out refuse a request.”
That conversation still requires time and effort. What about follow-up requests from smaller investors that can drain resources from responding to the more significant LPs in the fund? Can a GP ever decline a data request from an LP without an adequate rationale?
“Only if you’ve set that expectation during fundraising,” says Sinha. If the investor is looking to join an oversubscribed fund, the GP should be frank about their ability to go beyond standard reporting practices. “But if every dollar counts, the firm has to find a way to provide top notch client service.”
Due diligence is also an excellent time for GPs to get up to speed with an LP’s specific needs to build that “smart sheet” from day one. “We asked our LPs to tell us how we can improve our reports,” says Scott Edwards of Sun Capital. “Because our regular reporting has evolved in response to investors’ changing needs, we’re able to anticipate information requests and fulfill many of their individual requirements.”
One CFO explained that while a few years ago they’d spend the majority of their time fielding these follow-up questions, by proactively asking LPs for their own priorities, they were able to vastly reduce those phone calls. But given the continued complexity of the asset class, there will always be a need to clarify even the most comprehensive report.