This article is sponsored by Alter Domus
As the emergence of the coronavirus turned much of the world upside down within the space of just a few weeks, private equity firms have had to adapt – and quickly. While the move to remote working has largely bedded down, it is fast becoming apparent that covid-19 will usher in new ways of working and accelerate existing trends. But what form will these changes take?
We caught up with Doug Hart, CEO of Alter Domus, to find out how private equity firms are coping with the new normal and how the virus is shaping operations, opportunities and future plans.
What challenges have private equity firms faced since the covid-19 outbreak?
Initially, our private equity clients were largely facing logistical challenges stemming from their rapid move to remote working – that meant getting accounts, information and teams from an office to an online environment and enabling real-time access. During the first two weeks of that transition, several of our private equity clients used us as a repository of information – we acted as a central hub for them. Beyond that, there has been the need to put together financial statements and reports, conduct audits, and complete investment memoranda through electronic interfaces – all this at a time when portfolio companies will have experienced dramatic changes almost overnight. As well, there were deals that were already in progress – firms have had to figure out how to run due diligence, comply with Know-Your-Customer requirements and sign and close deals on a remote basis.
We have been able to support our clients in areas such as automation because we have been online for many years now. In some ways, this has helped many GPs overcome inertia or reticence to use technologies for these processes. Private equity was a little behind the curve compared to some parts of the investment community, but they have closed the gap very quickly.
What about LP information requests – these must have been significant as the economic outlook shifted?
LPs have understandably wanted to know their positions and exposures as the cycle has turned. GPs were getting a lot of inbound calls from LPs and they needed to be responsive and address open items swiftly. We were able to help with this as GPs were establishing remote operations by answering queries that would normally be dealt with by investor relations teams in areas such as cash positions, reconciliations, rosters of assets and basic holdings of portfolio companies right through to financial statements.
How is the current situation affecting fund valuations?
This really varies from sector to sector and even sub-sector to sub-sector. Some companies are performing extremely well, while others have found themselves void of all revenues almost overnight. And then there are those that are somewhere in between. So, you run the gambit from companies that need stabilising through capital injections to others that are raising debt capital to make acquisitions in offensive moves. You will find all or most of these situations in the same fund and so it can be quite challenging to determine how this shifts fund valuations. You also need to work out how this might affect carried interest and, in some cases, clawbacks.
While private valuations are happening all the time, the more formal valuations are quarterly. The Q1 financials feeding into portfolio company valuations at the end of March may only have reflected less than a month of the impact of the crisis and lockdowns. The next quarter will see the biggest impact and there will be some haircutting going on.
Have any surprises emerged from the situation?
One thing that has really surprised us is that environmental, social and governance issues have remained important throughout this, and have possibly gained more momentum. Due to the practical issues firms were facing, it could have been the case that environmental and social issues didn’t get much attention, but I think there is actually more focus on this because the crisis is having such an impact on both. The fact that air has been cleaner through lockdowns has also prompted more thought and discussion around the environment, how managers are reporting on ESG and the extent to which they are meeting their targets.
What will be the enduring legacy of the crisis on the private equity industry?
I think it will be technology transformation. Firms now see the importance of self-service for LPs, who want information at their fingertips that is easy to understand and in a digestible format. They want to be able to grab information via portals and get rapid responses to questions through online chat capabilities. We are already seeing interfaces that were previously perceived as for retail only converging with institutional investor platforms – that has happened in the past 90 days. We will be investing significantly more in our portals as a result.
Looking beyond covid-19, 2020 will see Cortland rebrand under the Alter Domus umbrella; can you talk us through that?
Alter Domus and Cortland merged two years ago and while our teams have been working together, the Alter Domus brand was not well known in the largest private capital market – the US. Cortland has strong recognition among debt capital markets and real estate fund managers in the US, yet the Alter Domus business covers around a trillion dollars of assets, including private equity, real estate, infrastructure and complex credit. By bringing the whole business together under the single Alter Domus brand we want to demonstrate our scale and capability to clients globally and help them draw the link between what were historically two businesses.
Are you seeing any positive changes start to develop from the crisis?
One of the biggest positives is that the move towards digitalisation and automation has accelerated. Firms can no longer rely on spreadsheets and manual inputting, for example. This also plays into a shift in how firms now view their middle-office operations. Historically, these have always been seen as critical to the front office and teams have been co-located in city centres where talent can be hard to find and keep.
For many firms, it has become clear that they can get value from their middle office remotely. Physical location is no longer vital, but the technology required for middle office teams to do their jobs effectively is now much more vital. Private equity houses will look to service providers to help with this.