Post-Pandemic Planning

Private Capital: Investor Transparency As A Differentiator

For Alt-Investments, building investor confidence during a downturn while positioning for the upturn

A new white-paper from fund administrator PEF Services focuses on what’s coming after the pandemic. Access the full report here.

WEST ORANGE, N.J., June 25, 2020 /PRNewswire/ — PEF Services, a leading fund administrator for Alternative Investment Managers, today announced the release of a new white paper entitled “Investor Transparency as a Differentiator.”

The report considers how General Partners (GPs) can win the trust of their Limited Partners (LPs) during the downturn and position themselves advantageously for the influx of allocations that are predicted to transform private capital in the future. If done right, investor transparency will maintain and possibly enhance the trust between firms and their investors.

Drawing on PEF’s extensive fund administration expertise, this white paper examines the need for investor transparency in capital activity, communications, reporting and issues related to valuations during uncertain times. It covers:

  • Critical roles of transparency and communications
  • Answering the questions that LPs are most likely to ask during this time
  • Sharing capital activity projections
  • The importance of adopting industry reporting standards
  • Identifying the right valuations and metrics
  • Choosing the right investor portal

While this economic downturn is unlikely to dampen the rising popularity of the alternative asset class (in fact, allocations have historically increased during downturns), it is definitely impacting investor confidence. To reassure uneasy investors, GPs should focus on supporting new levels of transparency, responsiveness, and candor.

“The way you communicate with your LPs during uncertain times will shape their perception of the relationship for years to come and have a direct impact on your next fundraise,” said Anne Anquillare, CFA, CEO and President, PEF Services LLC. “Investor communications and reporting are critical capabilities during a downturn, but they also hold the key to success as the private markets benefit from the inevitable upturn.”

Excerpts From The White Paper:

Communication Is Priority One

The trend towards greater transparency for the illiquid asset class was greatly accelerated by the 2008 recession as LPs, jolted out of a decades-long complacency, began to demand more information in order to monitor and understand their investments. During the downturn, GPs can expect LPs to renew the quest for more information as they seek to make sense of the market volatility that will impact valuations, exits, and returns in the coming months.

The way you communicate with your LPs during uncertain times will shape their perception of the relationship for years to come and have a direct impact on your next fundraise. A large part of that communication takes place through reporting, which this white paper covers in detail. But it also takes place through ad hoc emails, phone conversations, and meetings. Investors will be anxious for information and reassurance, and GPs need to demonstrate transparency through prompt and proactive communication.

  • Be More Responsive

Don’t wait until you have all the answers before reaching out. It’s more important to demonstrate your willingness to communicate swiftly and proactively. Share the answers you have today, and reassure your LPs that you are working on getting the rest of them soon.

  • Communicate More Frequently

This is the time to increase the cadence of your communications. Give your LPs frequent updates, let them know what you’re working on, especially with regard to investments on the “watch list,” and share what you think the future holds, especially with regard to capital activity.

  • Explore New Communication Channels

Opportunities for in-person conversations may not be possible for some time. Firms that have relied on face-to-face communication in the past need to explore new ways of engaging their investors. Consider hosting virtual meetings and interactive digital events such as Q&A or AMA (“Ask Me Anything”) sessions.

Investor communications and reporting are critical capabilities during a downturn, but they also hold the key to success as the private markets benefit from the inevitable upturn...

Be Ready To Answer The Questions That PLs Are Most Likely To Ask

  • How are you allocating resources to support your portfolio companies?
  • What are the strategies and assumptions underlying these choices?
  • Are you allocating time and resources to explore new investments during the downturn? Where do you see the opportunities?
  • What impact do you expect the current uncertainty to have on future valuations?
  • How would you characterize the credit quality among your LP base?
  • Have you spoken to your LPs about their liquidity? Have you conducted a credit analysis?
  • How will you be making portfolio-company data available in a timely way for review and analysis?

Over the next few pages, we examine some of the ways in which GPs can prepare themselves for honest conversations with their LPs, including sharing capital activity projections, delivering realistic valuations and metrics and adopting industry reporting standards.

Identify the Right Valuations and Metrics

Conducting valuations and communicating the data to investors pose a challenge to GPs even in the best of times. During uncertain times, the challenge becomes that much greater, as uncertainty complicates the calculations while increasing the level of scrutiny that LPs apply to them. This makes it more important than ever for valuations to be realistic and consistent to ensure credibility today and into the future.

Look To Your Peer Group

Arriving at fair value doesn’t mean applying a fire-sale price; it means conducting the valuation as an orderly transaction that takes current market conditions and comparative market value into account. If your peer group is down 20%, your valuation should be in line with that. There may be nuances that positively or negatively affect the value of a specific portfolio company, but any deviation from the peer group will need to be substantiated with evidence.

Stick With The Process

Whatever your valuation process, that process should be consistently applied during good times and bad. It may be expedient to use comparables during a market upturn and discounted cash flow during a downturn, but any time you shift your weighting between approaches, you need to have a strong and defensible rationale.

Avoid Double Dipping

To the extent that you’re using comparables, remember that within those comparables, future performance has already been adjusted. If you apply that comparable multiple to an adjusted future performance portfolio number, that will double-dip you to the negative. The International Private Equity and Venture Capital (IPEV) Board published special valuation guidelines to provide GPs with a framework for avoiding this situation and delivering LPs the fair value information they need during times of extreme market volatility.

 

 

 

 

About PEF Services LLC
PEF Services is the new standard in providing high-value, high-touch Fund Administration services and technology solutions that elevate operational performance to drive and support sustainable growth. Supported by senior professionals with extensive experience in alternative investments, PEF has a track record of nearly 20 years in delivering cost-effective, best-in-class solutions to Funds and General Partnerships, including Buyout, Venture, Emerging Managers, Real Estate, Debt, Fund of Funds, Co-investment, SPVs and SBICs. Additionally, the firm’s LP Administration Solutions Group focuses solely on meeting the unique administration and data needs of limited partners investing in illiquid alternative assets. PEF’s ViewPoint™ provides clients with a purpose-built portal that delivers greater visibility and real-time access to underlying investment performance data sourced directly from the official books and records of the fund. In partnering with PEF, firms increase operational efficiency, control operating costs, improve focus on core capabilities, and gain access to experts in private capital back office operations. For more information please visit https://www.pefservices.com/.

 

 

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