On 9 and 10 September, Private Equity International held its annual Investor Relations, Marketing and Communications Forum. Day Two saw a fireside chat between the director of private fund solutions at Nasdaq, Drake Paulson, and Michael St Germain of investment consultant Segal Marco, which has more than $500 billion in assets under advisement. Here are some key takeaways from the conversation.
Performance transparency is a must
Many pitchbooks contain phrases such as “top-quartile” and “value-add”, and these claims are often true, St Germain said. But if performance figures are heavily adjusted or accompanied by lines of disclosure, it is a clear red flag. Even if performance has been patchy, openness could benefit the GP.
“There have been instances with firms where Fund I was good, [Fund] II not so much,” said St Germain. “When you put in the data, you uncover things that explain some of the performance: ‘Wow, I didn’t realise that [equity size] of $50 million and above is really where the performance changed’.”
Technology drives deeper understanding of performance
Advances in software have enabled consultants to chop up and compare data at the push of a button, giving a deeper understanding of GP performance. Segal Marco will reconstruct deal- and fund-level performance and adjust it for factors such as deal size and when the deal was done.
“It’s not uncommon that you have a GP that’s been around for 15 years, on Fund VI or VII, and their since-inception IRR is 28 percent net and 2x MOIC,” St Germain said. “If you go back and zero-time it and neutral weight it… oftentimes [performance] is drastically different.”
Why are you the right GP for the job?
GPs will invariably describe their people as “world-class” or “industry-leading”, yet they don’t always say why. “They are highly experienced by the number of years they have,” St Germain said. “But why are they really good at integrating wholesale distribution companies in the Pacific Northwest region?”
Managers should avoid quietly adjusting deal attribution, either to make current investment professionals look better or to put the blame for failures on those who have departed.
ESG promises need to be backed up
While GPs are aware of the value placed by LPs on being able to demonstrate good ESG, they must ensure their claims stand up. If, for example, a firm enacts ESG policies at fund level but not at firm level, “it’s very noticeable, very quickly” and gets discounted, St Germain said. On the flipside, some firms don’t realise that they have ESG characteristics until it is pointed out to them.
“Especially in the venture world, a lot of groups, by nature of what they invest in, are very impact-oriented. You tell these groups and they go: ‘Oh, I never thought of it that way.’”