Private equity AGMs: In the spotlight

Seating plan disruption is one way in which Ralph Keitel learns more about private equity firms. When attending a dinner as part of an annual general meeting (AGM), if he finds himself positioned next to one of the managing partners, Keitel swaps around the name tags so he gets to sit next to a senior associate instead.

“I want to spend more time with the second-tier people and talk to recent recruits. If they are the ones to carry the firm in 5-10 years, I want to see them grow into that role,” says Keitel, a principal investment officer for the International Finance Corporation (IFC). “IFC often commits at time of first closing and additional people might be hired after we’ve done our due diligence. I can’t just invest in Fund I and by Fund IV realize they’ve not recruited enough high-quality second-tier people.”

An AGM is the only forum at which a GP must stand up in front of all its investors and explain how their capital is being put to work. However, many LPs find their most telling insights away from the stage: a briefing with a portfolio company CEO over coffee; a conversation with a senior associate at dinner; and a sideline chat with a fellow investor to compare notes. No matter how slick the presentation or how impressive the entertainment, these informal encounters, combined with clear portfolio information, help an LP assess how effectively a private equity firm is working.

There are countless stories of perceived excess at AGMs, many from before the global financial crisis. AVCJ has been told of rounds of golf, helicopter rides, strip club visits, and tête-à-têtes with film stars staged in the name of investor relations. One LP even described Hony Capital’s gatherings as a cross between Cirque du Soleil and a session with high-energy US life coach Tony Robbins. 

But these are simply supporting acts to the main show, which is detailing fund activity over the preceding 12 months. While LPs observe that some GPs don’t even get the basics right, it’s also true that you can’t please all LPs. “It is difficult to strike the right balance between broader themes and company-level detail,” says Katja Salovaara, senior PE portfolio manager at Finland-based Ilmarinen. “Different LPs want different things and it’s impossible to satisfy everyone 100%.”

Structure and process

Most AGMs follow a consistent format. Proceedings begin with a dinner and the next day starts early with a general briefing on the firm, an overview of the investment environment, and snapshots of the deal pipeline. This is followed by the portfolio update, which runs through the afternoon. Then another dinner and, depending on the number of funds, the portfolio update is completed on day two. LP advisory committee (LPAC) meetings may come before or after the main meeting.

The length and detail of these sessions varies greatly. Several LPs highlight an AGM held by an Australian manager earlier this year as an example of how to underdeliver. Investors were only invited to briefings specific to the funds in which they hold positions, which meant that for some the meeting was finished in 45 minutes. 

“At the end everyone was somewhere between very irritated and gob-smacked,” says one investor. “They only have about a dozen companies across the different funds, so they should be able to spend 20 minutes on each one. Making it fund by fund is pointless as well. An AGM is an opportunity for a GP to show itself off. By restricting certain LPs to certain segments, you are wasting an opportunity to do that. It also raises the question of what you are trying to hide.”

Conversely, examples abound of overdelivering. In one instance, a pan-regional manager took its LPs to a relatively remote location for a two-and-a-half-day meeting but misjudged the length of the portfolio update. That segment, which featured input from the management of every portfolio company, ran for 12 hours. The investors soon became hungry, tired, and inattentive.

Time-keeping is a concern for all LPs, but so too is how GPs choose to use it. Perhaps the most damning aspect of the aforementioned Australian AGM was that LPs received no presentation materials to guide them through the portfolio. This is unusual. A more common gripe is that presentations lack context and structure, allowing the presenter to say everything and nothing.

“There will be some random portfolio company presentations and you don’t know if it’s important or whether it’s in the fund you are in. We don’t walk into the room knowing everything about a GP. You must start with a session where you have the mindset of an LP: here is Fund VI, these are the investments by cost and value. You would be surprised how often that doesn’t happen,” says Sam Robinson, managing partner for Asia private equity at North-East Family Office.

Robinson’s ideal AGM happened in Europe a few years ago. The GP went through the portfolio update fund by fund; a slide detailed the holdings of each fund, including capital invested, capital realized, and current valuation; unrealized companies were broken down into three categories – superstars, strugglers, inbetweeners; and there was further assessment of the outperformers and underperformers because they have the most material impact on the fund. The AGM took half a day.

This corresponds to observations made by other LPs about the shortfalls of certain AGMs in Asia. These include a reluctance to provide forecasts on investments – in addition to providing information on where they stand now – and a tendency to substitute thematic for functional content. Distilling the portfolio into mini-sessions on sectors, value creation and exits can effectively highlight themes across the firm but not if it comes at the expense of clarity. Inevitably, the companies that are skimmed over are those that aren’t doing so well. 

“GPs sometimes don’t want to talk about deals that are underperforming,” says Pamela Fung, an executive director at Morgan Stanley Alternative Investment Partners. “But it is hard to believe that everything is rosy. LPs want to hear about lessons learned and how problems are being fixed. It means the GP is being thoughtful

Using the CEO

When LPs point out that information is missing, they are sometimes told that the GP didn’t realize they were interested in information that can already be gleaned from the accounts. The assumption is that the presentations should go further, offering color on individual portfolio companies and input from the management teams. This is true, but only to a point. 

For example, Edward J. Grefenstette, CIO of The Dietrich Foundation, which has substantial VC and growth equity exposure in the region, wants the portfolio company CEOs to be present at the opening dinner (“I like to ask the question, ‘If an emergency comes up and you can call one person on your board, who do you call?’ If there are four different funds invested in a company, the answer tells me an awful lot”), but not during the following day’s briefing. The rationale is that deal team members are less likely to give a frank assessment of an investment if the CEO is sitting in the room.

He recommends GPs take advantage of CEOs being in the same place at the same time and organize workshops, allowing them to share experiences and find ways to collaborate. 

Other LPs are less insistent on excluding portfolio company management from AGMs – a difference of opinion could be seen to reflect the contrasting realities of growth investments (the CEO could also be the founder and controlling shareholder) versus buyouts (the CEO is likely appointed by the GP). However, there is general agreement that most CEOs will happily talk for 25 minutes about their company despite being allocated 10 minutes and this should be discouraged. Limiting the number of speakers is one solution and swapping videos for in-person presentations is another. 

NewQuest Capital Partners, an Asia-focused secondaries specialist, addresses the issue by inviting two CEOs to speak and then going through the rest of the portfolio at reasonable speed, with one slide per company. This is followed by spotlights on certain businesses, usually ones that are recent investees or where there has been significant value creation, and a segment on investments that haven’t gone according to plan.

“One of the problem companies might become a spotlight the next year because we’ve helped turn things around,” says Darren Massara, a managing partner at NewQuest. “Spotlights last about 15 minutes and we give the full metrics for the company down to margins for different business lines, an overview of the competition, maybe a video. Company management is not present.”

Two Indian GPs are also singled out for complementing the portfolio overview with content that offers insight into their workings. Kedaara Capital has in the past given LPs a step-by-step tour of its approach to deal-sourcing, from detailed sector mapping and segmentation to tracking specific companies. ChrysCapital, meanwhile, breaks up the AGM in the afternoon into sector-focused groups, which enables the GP to discuss its investment process with a smaller number of people.

Creating scenarios in which a variety of investment professionals make presentations serves the added advantage of enabling LPs to meet the wider team and get a sense of how the firm is evolving. The last thing they want to see is the managing partner presiding over every aspect of the meeting.

Pacific Equity Partners (PEP) encourages its investment professionals to mingle during the AGM and LPs can set up sideline meetings to discuss team dynamics in more detail. All managing directors - of which there are presently around a dozen – are also required to participate in presentations. 

Tim Sims, a co-founder and managing director at PEP, notes that it is “easy to see people’s behavior and character from how they present,” yet the firm’s apprentice-style approach to staff development means there is a common ethos. “We have a strong language – not just PowerPoint, but the way we use it, how we speak,” he says. “When speaking a common language, you end up role-modeling off one other and a degree of homogeneity emerges.”

The big show

At the same time, an LP’s objective is in part to pierce the corporate glaze. Some private equity firms issue directives to team members on how to present themselves – style and color of suit, embargos on facial hair – and even more provide training, often much needed, on how to present. But it is possible to be too slick, too uniform.

“If you stop at form over substance you are missing the point,” notes Eric Marchand, an investment director at Unigestion. “That said, I was bred in GE’s management programs and US private equity firms have a similar way of presenting: hold your hands close together, don’t move too much. While it can make the content more palatable, if they do something like respond to every question with ‘That’s a great question,’ it gets tiresome and may be construed as disingenuous.”

A second LP makes a similar observation of KKR meetings: the presenters employ similar styles – for example, they all open with a joke – that implies the influence of a single coaching ethos. This was a minor criticism of what is identified as one of the best Asia AGMs by a global GP. “Well delivered” and “to the point” are two oft-used descriptions – when other firms are criticized either for championing their successes and ignoring their failures or jumping between different strategies. 

“Big” is another. Once a meeting achieves a certain critical mass, for some it becomes harder to penetrate. No matter how comprehensive or compelling the presentations, if there are 200 LPs in attendance, there is less of the intimacy and interaction through which additional insights into the GP can be gleaned. In general, large gatherings don’t facilitate post-presentation questions because LPs are reluctant either to disrupt the schedule or put GPs on the spot in such a public setting.

In this respect, a meeting staged by a global firm might be viewed as part corporate branding exercise and part symposium on the market. Especially for larger GPs, the AGM is one of many engagement tools. In addition to quarterly reports, a US LP typically receives updates on multiple products from the firm’s local investor relations team as well as meetings with Asia-based executives coming through the region.

“Information is being shared constantly so the AGM shouldn’t have to be a huge download of everything. The reality is this is your big event, you are exposing the brand in public,” says Brian Lim, a partner at Pantheon. “However, there are two different perspectives. We are based in Asia, so we have interactions with GPs throughout the year locally. If I was only making one or two trips here a year, I might want more content. I can see how some AGMs could fall short in that way.”

LPs do not rely solely on AGMs to assess managers, but the way in which these meetings serve different purposes to different investors illustrates how GPs cannot satisfy everyone. Someone who sits in New York might appreciate an invitation to a location offering a taste of the dynamics that shape the investment narrative, opportunities for portfolio company visits and one-on-ones with the GP, and a meeting heavy on presentations from economists and panel discussions. 

By contrast, an LP based in Asia who covers the region full time, may find they are being taken over well-trodden ground unless the content is highly focused. “We go to AGMs to talk to other LPs,” another fund-of-funds executive says. “We might also want to price a secondary, but if we come to the AGM and get the full presentation deck, we still at the minimum set up a call with the deal team. Not enough is said publicly at AGMs.”

Consistency counts

It is therefore difficult to draw definite conclusions about what constitutes best practice, beyond surpassing the minimum requirements in terms of information disclosure. LP feedback tends to focus on individual GP traits and it is often conflicting. Although there has been little innovation in terms of the structure and substance of AGMs – the general takeaway on Asia is that meeting quality has improved markedly in the last 10 years – there are no calls for specific wholesale change.

A few GPs in the region hold supplementary meetings in the US and Europe and others have small-scale sessions in Asia. But neither satellite events nor video conferencing is expected to supplant the opportunity for face-to-face interaction in the GP’s home territory. “The way an AGM is organized does say something to the ability of the firm to execute – if they can’t do it well what does that say about their ability to get an investment done?” says Doug Coulter, a partner at LGT Capital Partners. “When a GP is under-resourced and understaffed, things fall through the cracks.”

AVCJ was able to identify just one mainstream GP in Asia that opts out of holding meetings. Australia-based Quadrant Private Equity started out giving LPs one-on-one briefings and it has never stopped, largely because performance is strong, the funds are oversubscribed, and LPs are reluctant to push the issue. “It’s still a small team and [the executive chairman] can cover in half an hour what most GPs cover in a day,” says one LP. “But I would rather they had an AGM.”   

 

SIDEBAR: In short - What LPs want

Scheduling: If an AGM is taking place around an industry conference, try to limit the amount of overlap with other events.  If it’s not, give LPs enough notice so they can arrange other meetings

Context: Don’t assume LPs come to the meeting appraised of all the facts. Start by telling them what they are invested in and how much is at stake

Transparency: Don’t hide from your mistakes. Explain how underperforming investments will be turned around and how the lessons learned will be applied to new deals

Conciseness: Most LPs prefer a main session that runs like clockwork, with the option of one-to-one follow-ups or portfolio company visits

Relevance: Don’t let a portfolio company CEO talk for 25 minutes. In fact, don’t let every CEO talk. In the interests of conciseness, speakers should keep their presentations to the point

Access: All team members should be in attendance and accessible to LPs, while a variety of senior professionals should participate in the presentations

Restraint: Lavish hospitality is unnecessary and, for some, unacceptable. A GP that spends big on dinner, entertainment or gifts is inviting questions about who’s paying for it all

Comfort: LPs appreciate a comfortable chair and a few breaks over the course of a long day to regroup and catch up with their peers

 

SIDEBAR: The extras - Levels of comfort

When a private equity firm held its AGM in Calcutta, LPs were invited to dinner with Bollywood icon Shah Rukh Khan followed by box seats for the Kolkata Knight Riders, the cricket team that Khan part owns. Despite the obvious star power, this engagement was positioned as an educational endeavor.

“This was all about investing in the India consumer story, and Bollywood and the IPL [Indian Premier League] are central to that. There were similar activities around their cinema business,” says a source close to the firm. “Just having a celebrity come and shake hands might be appealing to some, but not to others. Ideally, there should be some knowledge with the entertainment angle.”

This GP has a consumer-oriented mandate and a portfolio with natural retail appeal, even to investors (the gift bags at its AGM are said to be among the best in the region). But there is now also an awareness – and this applies to all PE firms – that extra-curricular activities and giveaways must be relevant and restrained.

Compliance is the key driver. AVCJ asked an assortment of LPs to name the most expensive gift they had received at an AGM in recent years – it was an iPad. And this would constitute a problem for many investors, given they are barred from accepting anything remotely outlandish ($50 seems to be the general limit; and it helps when GPs attach price tags to items).

Some LPs are obliged to recompense GPs for meals they receive at AGMs and they may also be subject to restrictions on accepting flights and hotel accommodation, although not all GPs offer to cover those. LP advisory committee members are usually entitled to be compensated for business expenses – getting them to the meeting and housing them while there.

In this context, small gifts connected to portfolio companies are well received, though not seen as essential. One LP still uses a Samsonite wallet he got from CVC Capital Partners; MBK Partners has offered backpacks made by Nepa, its outdoor apparel brand; and Australia’s Allegro Funds handed out Everest Foods ice cream at its AGM earlier this year.

Lavish hospitality raises eyebrows. “There is often an inverse correlation between the profile of the entertainment acts a GP brings in and the performance of its funds,” one LP observes. Above average jazz bands, musical or artistic performances that reflect the culture of the country in which the AGM is being held, and engaging speakers from the world of local business or politics are not uncommon dinner entertainment. They generally aren’t seen as excessive.

Anything non-commensurate with the resources of the GP will invite questions as to who is paying for it – the firm or the fund. “Large managers often feel they need to take LPs to fancy restaurants. If you are a first-time fund manager, it is fine to serve a simple meal at a simple place,” says Ralph Keitel, a principal investment officer for the International Finance Corporation (IFC). “If I see a small GP spending too much money on the AGM, I will let them know.”

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• Topics
• GPs
• Fundraising
• LPs
• Asia
• Investor relations
• NewQuest Capital Partners
• Pacific Equity Partners
• The Dietrich Foundation
• LGT Capital Partners
• Morgan Stanley
• Pantheon
• IFC