Private equity will emerge from the current downturn a transformed industry in many respects. Take, for example, the enforced ubiquity of fair value. Where once some GPs thought that the rigmarole surrounding fair value documentation would go eventually go away, it is now clear that these exercises will be a quarterly fact of life.
But like many new headaches reached at each life stage – homework, paying a mortgage, taking Lipitor – firms in private equity's more mature market will embrace more intensive quarterly valuations and the best will excel at this and make it part of an overall culture of investor relations excellence.
This broader topic of IR was dissected at last month’s PEI Investor Relations & Communications Forum in New York. In addition to the recognition that fair value is here to stay, other key takeaways from the well attended and well reviewed event are listed below:
Firms will need to be much more open: Bad times call for more information and more consistency in how the information is presented. Make sure all your GPs are reading from the same playbook. Once the bad times recede, the systems set up to deliver transparency will not go away and LPs will continue to demand all kinds of data that in prior times they would have been too timid to request.
Most private equity firms will have to register: It is unclear exactly what new regulatory changes lie in wait for private equity, but it is hard to find an expert on the topic of securities law who doesn’t believe that SEC registration for all but the smallest private equity (and hedge fund, and real estate) firms is inevitable. In the meantime, European firms are bracing for a new set of disclosure rules that would cover most of the substantial players across the region.
Non-ostentation is in fashion: Meetings need to be just the facts, private jets will be called into question, the new office in Majorca is to be resisted. As per the point on openness above, if LPs get the sense that you are blocking their access to portfolio company information, you may get a roasted chicken leg thrown at you.
Building a brand is very difficult: GPs who think that a bare-bones web site and a Rolodex will carry them through increased competition may have another think coming. A sustained effort to stand apart is barely sufficient to make it in today’s business environment.
Let your portfolio companies tell their stories: Winning the affections of lawmakers, regulators, the press and, most importantly, LPs, will be accomplished through unleashing the power of your stable of CEOs, who can give first-hand accounts of value added and jobs created. As soon as possible, private equity firms need to introduce these CEOs to their local lawmakers, most of whom have no idea which local companies are owned by private equity.