It was only last month that I wrote to you with advice on how to talk to your investors about Brexit. Well, a month is a long time in private equity, it seems, and Brexit already feels like old news. “Unprecedented” is the word most conspicuously deployed to describe the current environment, and your familiarity with history beyond the modern era will dictate how appropriate you find the usage to be. In any case, we can probably all agree that the situation of COVID-19 is:
2. uncommon; and
These three characteristics, together, mean that COVID-19 is a topic that:
a) cannot be avoided;
b) is difficult to understand and explain; and
c) must not be ignored
As such, your investors are going to have questions. Do you have the right answers?
The timeliness, manner and extent of your communications will inform how your stakeholders interact with you over the coming months. By saying nothing, you leave your status and your ability to continue to operate up for discussion: not a good idea against the backdrop of so much uncertainty.
Let’s now take a look at the areas of most concern to investors, in the hope that this can provide you with a useful framework to put together meaningful and well-evidenced responses.
1. Key person impact: has anyone tested positive of COVID-19?
Investors will ask how you have been directly affected by COVID-19, and how you are responding:
- Have any key staff tested positive for COVID-19?
- How are they doing?
- How is this affecting your operations?
You should be transparent about any confirmed cases of COVID-19 in your firm. A short communication explaining who has contracted the virus and how they are doing will suffice. In the current environment where social distancing and related governmental advice is restricting gatherings, it is unnecessary to offer, unprompted, the specifics of staff members that have identified themselves as symptomatic and are self-isolating, but you should be able to answer questions about this, if they arise. Remain measured in your tone and focus on the facts. You will reassure your investors by providing a clear understanding of the situation, supported by evidence that you are a) not panicking; and b) managing to carry on running the business. The worst thing that can happen is that your investors hear about someone testing positive through market gossip. Details are already circulating about which firms might be affected – don’t let your stakeholders find out this way.
2. Continuity: business as (un)usual
Investors will also want to know how well you are managing to run your business, and what steps you have taken to safeguard operations:
- Are you able to run your business from an operational perspective?
- How can we most easily get in contact with you during this time?
Ideally you will already have a robust disaster recovery plan and detailed business continuity provisions in place, as part of your risk management function. This should include: processes, systems and technologies for working from home (what they are, how they have been tested; how they are performing); how you will be communicating with your investors and how they can contact you, directly. Don’t forget to include how you will deal with your key advisers and suppliers during the changed environment. You should be explicit around any expected delays to typical response turnaround times, so that these are not a surprise, should they occur. LPs will be reasonable, to a point, as long as you communicate any changes, in advance.
3. The portfolio: value protection
Depending on your relationship, these may be the first questions your investors ask. And even if they are not, they are probably the questions they think of, first:
- How are your portfolio companies being affected and where do you anticipate impairments?
- How are you managing portfolio companies through this time and when do you expect things to improve?
- How will valuations and exits be affected?
Company by company, you need to be able to articulate a clear status and action plan for your entire portfolio. The expected impacts, short and long term, as well as what has already been felt, are of key importance. Be sure to explain clearly how you are mitigating the risks in each business and communicate how your approach is nuanced, according to each company’s situation. Outline how you are working with your portfolio companies to maintain your monitoring abilities and, perhaps, improve data collection, further. Be sensitive to any concerns voiced by your LPs, no matter how unfounded you believe them to be: acknowledge the concern and then state your view, clearly, and in a non-emotive way.
LPs will pressure you to understand when things will improve, but you should resist the temptation to make declarations. Nobody knows what is coming next and how long it will last. Anybody who says they do will look great for a short time and, in all likelihood, terrible from then on. It is never a good idea to build communications and brand around something you cannot control and the COVID-19 situation is no different. Rather, be the firm that is honest, clear, humble and collaborative. Outline your considered response to the situation and the basis for your hope that it will succeed – make no promises that it will.
Finally, you should anticipate questions around valuations and distributions. Is now the right time to exit? What is happening with any live processes?
4. The drawdown: sensitivity to LP liquidity issues
Many LPs are facing liquidity pressure in the face of devaluations in the public markets and a slowdown of distributions from their private markets investments. Now may not be the best time to ask for money:
- Are there plans to offer reduced commitments or to delay drawdowns, to prevent LP defaults?
- Have you got plans in place to bridge or otherwise finance necessary portfolio activity?
If you are pausing origination and anticipate a need to amend, extend, or suspend the investment period for your fund, let your LPs know. Many will find this a relief, at the moment, but you need to be clear about how you will “catch up”, when normality returns.
If you intend to continue origination activity and investing, you should expect push-back from LPs and you must be sensitive to this. There are other financing sources available now and fund finance, preferred equity and related solutions could be a good option. Investigate your options now and get things in place quickly. There is limited capacity and you will want to make sure you are one of the first in line.
The road ahead is uncertain and being honest about this is important. If you are able to show a steady hand to your investors you may well be amazed at how this calms them. Communicating clearly and early communicates, in itself, a great deal:
- it shows you care enough about your stakeholders to invest time in them, even during a crisis;
- it shows you are still connected and able to operate; and, most critically
- it shows that, if things get worse, you are committed to a particular degree of transparency/level of communication.
There is little more frustrating for an LP than desperately trying to make contact with a GP who appears to be in hiding. Be visible. Be proactive. Be clear.