Reporting between the lines

The true mettle of an IR professional is never revealed at an annual meeting. It's the unexpected events that arise over the life of a fund that reveals the effectiveness of any communications strategy. When that founding partner leaves to join a traveling theater troupe, or when that ?challenging? asset collapses, the firm is left to decide how and when to share the news with their limited partners. Given the volatility of today's markets, there may be plenty of chances for IR staffs to prove themselves.

Firms should remember that most LPs don't wither in the face of bad news, but they want to hear it from the GP first. In terms of developments at the fund level, personnel changes, especially exits of anyone above an associate, always warrant a phone call or email. At the portfolio level, investors want to be kept abreast of anything that could end up in the public eye. Unexpected bankruptcies or off-strategy investments should be reported in a timely fashion, but most LPs never want to learn anything new about their investments from the FT or The Wall Street Journal. The current economic woes have left investors with plenty of questions, and firms are stepping up their ad hoc contact in response. Some are scheduling an extra advisory committee meeting, while others have commenced one-onone portfolio reviews at the LP's convenience throughout the year.

?Some of the best exchanges we have with the GP are the ad hoc meetings we have when visiting them. They don't pull out any slides, and we don't ask them to complete an RFP. We have an informal talk about the team, the market and the portfolio.?

?If you want to make a difference, it's got to be verbal,? says Richard Hurwitz, the VP of communications and IR and Boca Raton, Florida-based Sun Capital Partners. ?They can read the quarterly reports and review the annual meeting materials but nothing beats a one-on-one conversation to provide context and clarity on a given event.? But what events warrant an additional phone call, email or meeting? While investor opinion can vary, there are some situations that most LPs agree should be reported as soon as possible.

Graceful exits
Any delay in reporting the departure of a senior investment professional is likely to spark LP ire. ?I hate to hear about departures from the firm that hired them away,? says Sheryl Schwartz, managing director and head of alternative investments at TIAA-CREF.

Further to this, ?We would much rather receive a phone call to discuss an exit,? says Kevin Delbridge, a senior managing director at Boston-based HarbourVest Partners. Delbridge says that this gives the firm a chance to explain the departure and assure LPs that the new vacancy is being addressed.

?Unless we are fully informed [on the executive's departure], we don't know if it's part of the natural evolution or something more sinister,? says Bruce Feldman, the head of alternative assets at the Pennsylvania State Employees' Retirement System (PASERS). ?If they can tell us that the partner sat on the boards of these companies and will remain there for a transition period ? that kind of detail can minimize the impact of an exit.?

Most LPs agreed that the exit of any professional above the level of an associate or analyst warrants an explanation, with the more senior professionals requiring the most details. One investor says a good rule of thumb is that if the executive appeared in the PPM or was part of the marketing materials, they'd like to know if they've left the firm. A few LPs shared that they expect turnover at the bulge-bracket firms but for funds with fewer than 20 professionals, these exits are particularly significant.

Feldman recounts one instance where a partner at one fund was rumored to be leaving to pursue political aspirations. ?When we contacted the firm, they assured us there was no substance to the rumors, only to discover a few weeks later the co-founder was running for public office,? says Feldman. ?This departure was particularly important to properly communicate to us, not only due to the seniority of the professional but the high profile of the exit.?

Robert Gentzel, the head of communications at PASERS explains that as a public pension fund, Feldman has his own reporting responsibility. ?Eight times a year he [Feldman] meets with the trustees, all of whom won't hesitate to call him throughout the year if they read something in the press relevant to the fund's investments,? says Gentzel, ?So GPs need to arm him with the best information possible to answer any inquiries that come his way.?

Portfolio news
Most LPs stress that the real standard for picking up the phone is when a story is interesting enough for the media to pick up. ?If we can read about the development in the Wall Street Journal, I'll want to know about it beforehand,? says Tom Kerr, a principal with Pennsylvania-based Hamilton Lane. ?There's plenty of portfolio performance data available through the traditional channels, but if there's a chance for news coverage of it, we'd appreciate a call or email.?

Investors also stress that any regulatory or legal issues matter. If it involves a lawsuit, or government investigations, it should be reported, even if such developments don't grab headlines. One LP recounted the story of a Ukrainian investment they fretted over because they read news of a regulatory action that may mean a portfolio company would be repatriated. Their worries proved unfounded, but the failure of the GP to address the issue left them to spend the time and effort to get answers.

Unexpected performance downturns are also worth a phone call to certain LPs. ?Bankruptcy filings within a portfolio not dedicated to distressed assets should be explained to investors, if not before the filing, certainly within a short time thereafter,? says Feldman.

Schwartz stresses that write-downs and write-offs at the portfolio level and changes in strategy should, and typically are, communicated prior to quarterly reports. One IR director feels that if a weak quarter was built into their investment case that might not be a cause for concern, but two bad quarters is worth talking about.

These guidelines hold true regardless of the ups and downs of the market, but today's environment may warrant an additional effort to calm jitters about broader economic volatility. ?Right now- stretching back to June or July there is clearly more desire on the part of LPs for more contact and information,? says Jim Rutherfurd, managing director of IR at New York-based Veronis Suhler Stevenson. ?It's not just about specifics regarding us. They need more information because they're exposed to all financial crisis coverage and are looking for as many data points as possible about the widespread problems of the economy.?

Karla Popper, the VP of IR at New York-based CCMP Capital Advisors noted that recently the firm issued a letter to investors discussing how the firm is addressing the current market challenges. ?We view our LPs as true partners and therefore frequent communications about our portfolio companies and market conditions are essential. And, there are too many ways to communicate these days not to be in touch,? Popper says.

?We're exploring using webinars and web presentations, but we're most likely going to be instituting an annual conference call to give investors another chance to hear the sound of our voice and raise questions,? says Rutherfurd.

Other firms have sent letters or simply lodged additional phone calls. ?As we get to know our LPs' needs, we can accommodate the level of detail and type of contact they prefer. Some like more frequent in-person meetings, whereas others prefer written materials like our quarterly and annual reports,? says Popper.

A little more conversation
Some firms are making ad hoc reporting less, well, ad hoc. ?I've begun sending out emails to LPs on a regular basis, offering the chance for one-on-one portfolio reviews,? says Sun Capital's Hurwitz. Sometimes these reviews take place over the phone, and sometimes in-person, depending on the LPs' travel schedule. ?Investors are unsurprisingly happy to drop in for a visit to our Florida office ? between October and May, when the weather's best down here.? ?We have an open-door policy so on a couple of weeks' notice, we do a review and meet with partners if they're in town at the time,? says Hurwitz. ?You've got to increase frequency of contact to assure them that you're remaining faithful to the investment strategy, that performance is steady and in this market, that there are no glitches on the horizon.? Hurwitz says that he tends to send 10 letters a week, and since beginning the program, averages two or three reviews per week, mostly over the telephone.

?Some of the best exchanges we have with the GP are the ad hoc meetings we have when visiting them,? says Delbridge. ?They don't pull out any slides, and we don't ask them to complete an RFP. We have an informal talk about the team, the market and the portfolio.?

Delbridge notes one of the advantages of these face-to-face meetings is that LPs feel more comfortable asking the tough questions and that while GPs can provide some stellar answers at the annual meeting, there's more of a chance for follow-up questions for LPs who may misinterpret any explanations. ?The annual meeting is primarily a flow of info from the GP to LP, but here, it's a two way street,? says Delbridge, suggesting that the best ad hoc IR may be a dialogue, not a speech.