Time to review the review

The era of private equity being a uniquely private affair is over. But industry leaders should recognise the value of setting out the firm’s strategic vision in an annual review. By Grania Fitzgerald of Bladonmore

Picture the scene. A founding partner of a leading emerging markets buy-out firm is becoming progressively more frustrated with his fellow partner as they disagree over the raison d’être of the firm’s maiden annual review.

One of the two is deeply sceptical of the whole exercise, arguing that the quarterly updates and annual meetings are a significant enough investment to keep LPs up to speed.  After all, if he wanted to spend a lot of time and money producing publicly available reports and disclosure documents, he could easily work for a quoted entity subject to more onerous requirements.

Meanwhile, his fellow partner believes the exercise affords an opportunity to signpost the firm’s evolving strategy and showcase the breadth of its investment talent. Furthermore, by being proactively transparent, he wants to leapfrog some of the firm’s rivals and use the document as a symbol of why investors could trust his firm as a manager of their assets.

For almost four years – since Sir David Walker first set out his recommendations for transparency and disclosure in the industry – Bladonmore has been helping private equity firms better understand how they can present themselves more effectively to the outside world. As part of this effort, we also publish a number of annual reviews on behalf of our European clients.

As the industry faces tighter regulation in Europe and, potentially, the US, now is the time for all firms to look at how they communicate with the outside world and, in particular, their attitudes towards publishing an annual review.

While it is arguably too nascent a document to have developed strong best practice guidelines, our dealings with a number of progressive and successful firms gives us a relevant perspective on this evolving strategic communications device in the armoury of the industry.

We have developed a set of beliefs which we share below:

* Use your Annual Review as a strategic document: An effective document might explain how the firm's investment strategy is evolving to keep with the times while also staying true to the original investment thesis of the fund. Choose your words very carefully as conscientious investors – existing and future – will review them with a keen eye.

* Use your Annual Review as a yardstick: While it may be counter-intuitive to many in the industry, there is value in using a set of consistent data point to demonstrate how you add real value beyond a warm market wind.  The key here is setting out your stall on an annual basis – not just when you have good news to report. The best performing and most confident funds should be unafraid to hold themselves to account in the public domain. For the time being, you are under no obligation to publicly detail a full suite of financial data relating to the P&L, balance sheet and employee numbers either for the portfolio as a whole or on an individual portfolio company basis. However, when you do decide to disclose information this will need to be sustained in subsequent years. The absence of strict reporting standards provides an opportunity to use infographics to bring these pages to life and really get the message across.

* Use your Annual Review to showcase talent: There are a lot of brilliant and entrepreneurial individuals who have founded a private equity business but sometimes investors are interested in the calves as well as the bulls. Where other members of the team are making a meaningful contribution to the day to day running of the firm you should take the time to explain how. Succession remains a hot topic within the industry and these documents can be a good way for investors to understand and be presented with the future guardians of their capital.

* Use your Annual Review as a branding tool: Identifying, articulating and highlighting a firm's values is not marketing guff. They are signposts of behaviour and a useful reference point for investors, vendors, advisers and management teams.

* Use your Annual Review as a catalyst for change: The discipline of publishing an Annual Review provide a timely reminder to refresh any other publically available content such as online content and marketing materials. There is no reason why a fund's web-site should not be updated on an annual basis following the publication of this content.

* Use the process as well as the finished product as a communications tool:  The production of an Annual Review as a valuable opportunity to create dialogue, internally as well as with investors and portfolio company manager. If the process is managed well it can create not just greater transparency around the firm and its activities but also a sense of common ownership among key stakeholders.
Given the public and political pressure to increase disclosure requirements now is a good time to review your firm’s attitude towards an Annual Review.  Not all such documents hit the bulls eye by any stretch of the imagination but the best ones are emblematic of a thoughtfulness that can only help to serve the interests of the firms and industry as a whole.

Grania is an account director at Bladonmore and leads branding and corporate reporting projects. She has extensive experience of managing financial, marketing and corporate communications projects in-house and within communications consultancies for clients across Europe.