An attribution scoring exercise can provide a framework for selecting which investments to include within a track record. But how do you provide external verification of the level of involvement of team members in each deal in the track record, thereby validating the attribution exercise and justifying the track record as ‘yours’?
This article builds on some of the topics discussed in our previous article, Track record attribution (part 2): following the recipe, where we discussed some important considerations when undertaking a track record attribution scoring exercise.
One method by which to do so is a referencing exercise, whereby detailed calls are undertaken with the key counterparties on each deal in your track record. In summary, the referencing exercise will entail a reference call (or most likely calls) being undertaken for every deal in the track record. Each call should discuss the relevant deal in some detail, covering the background and history of the transaction and – crucially – your role and level of involvement. Counterparties to consider including in the referencing exercise include the Chairman and/or CEO as well as CFO at each company, along with key intermediaries, in particular the sell-side adviser, who will be able to speak well to the sourcing of the transaction, why you won the deal vs. other bidders in the running, and how you built the strongest relationship with the vendor and management team.
The aim is to bring to life your level of involvement and thereby validate your attribution scoring and thus inclusion of the deal in the track record. You built the relationship with management that secured it. You led the deal team. You were the key day-to-day person monitoring the investment, sitting on the company’s board. You worked with management to drive the initiatives that helped to grow and transform the company, thereby creating value.
Write-ups of each reference call will be made available for prospective investors to review via a controlled environment such as the electronic data room. It is preferable to make access to the reference pack an ‘on-request item’ and to provide it only to prospective investors that have completed or substantially completed their commercial due diligence. By doing so, you can have some confidence they are already ‘on the hook’ for a commitment and – hopefully – the reference pack will be confirmatory of an already-formed positive view. With a first time fund, however, track record attribution can be an early gating diligence item for prospective investors. In which case, you would want to make the reference pack available early, in order to get prospective investors over this go/no-go issue and persuade them to take their review to the next stage.
Investors are often highly sceptical of reference packs where calls have been undertaken by a Manager or even a placement agent. As such, it is best if the referencing exercise is carried out by a credible external party with the requisite level of technical knowledge and experience. Best practice is for a Manager to have no involvement in the actual reference calls at all and to in fact never have sight of the finalised write-ups. By having the reference pack prepared on an arms-length basis in this fashion, you lend it credibility.
The written reference pack will need to be supported by the opportunity for prospective investors to undertake their own reference calls. Thus it will be necessary to provide a reference list. Again, it is preferable to make the reference list an on-request item and for reference calls to be undertaken by prospective investors once they have substantially completed their commercial due diligence.
In our upcoming fourth and final piece on this topic, we will outline five key considerations for new managers to keep in mind when (re)constructing a track record.