Friday Letter: The information gap

Times have certainly changed in the world of GP/LP communications. As Maarten Vervoort, head of European fund investments at AlpInvest Partners, fondly reminisced at our inaugural European investor relations forum in London last week, the ‘kitchen table’ annual meeting used to be commonplace. It was so called because many GPs’ limited partner bases were so modestly sized that all representatives of the fund could easily be accommodated around a small table. In today’s era of the mega-fund, by contrast, certain LBO behemoths would be hard pressed to shoehorn all their investors into an aircraft hangar.  

As investor pools grow larger, you might think that distributing quality information to LPs in a timely manner is an increasingly onerous task confronting GPs. And you’d be right. But you’d be wrong to assume that investors in private equity funds today end up getting a raw deal. In many ways, they’ve never had it so good. For example, access to all the basic historic fund information that a limited partner could possibly require is these days available literally at the tips of their fingers: a password to a web-based intralink has today almost universally transplanted quaint but old-fashioned paper-based reports. A recent survey by sister publication Private Equity International found that 90 percent of LPs now receive fund information via secure websites provided by their GPs.

As well as the immediacy of information, consistency is also an improving area. One panellist at the forum suggested that, around six years ago, GP valuations of portfolio companies were “a mess”. Now, thanks in no small part to the efforts of industry bodies such as the EVCA, the recently introduced International Private Equity and Venture Capital Valuation Guidelines have won almost universal approval. At the end of March this year, the EVCA announced the Guidelines had been endorsed by 21 European and non-European industry associations. Late to the party, the US private equity industry is expected to follow suit (with only “small and subtle” changes needed to accommodate it, according to one leading proponent of the Guidelines).

So, on the basics at least, GPs appear to be scoring high marks. But, for many in the investor community, basics are not enough. In the words of one forum panellist representing a leading European LP group, what investors really want is what he described as the “tough information”. Sometimes this involves requests for crystal ball-gazing – some GPs report that they have been asked by their LPs to project the performance of funds. But, while this is rare, GPs may well be expected to drop some pretty strong hints about the prospects of individual investments, if not the fund as a whole.

In the spirit of what some in the industry refer to as “proactive” information provision, LPs now expect their GPs to be as open as possible – and that includes signalling when there’s bad news looming. One question that arose during one of the forum’s debates was when exactly LPs should be notified if a portfolio company is running into trouble. The most popular view seemed to be that if the corner could be turned within the reporting period, GPs would be justified in keeping counsel. But if there’s a real possibility of a write-down on the horizon, investors should be notified as soon as possible.

One particular concern voiced by LPs at the forum was with regard to club deals, with one describing them as “a crisis being stored up”. Specifically, if problems occur at a company where a number of private equity firms have joint ownership, who would take responsibility for briefing not just LPs but also other interested parties – such as the press – on ongoing developments? Would all parties sing from the same hymn sheet, or would the communication process become jumbled by a series of disparate messages?

While LPs on the whole seem happy with the historic information they are given these days, question marks continue to hang over GPs’ ability to effectively communicate the ‘tough stuff’. An information gap remains.