GP communication strategies: Clearing the air

Alma Lawrie, head of investor relations at Samena Capital, has seen GPs chafe under demands from LPs and regulators for greater disclosure. But those sentiments are no longer topics of possible rebellion by fund managers; the battles already been resolved.

"I think from a GP perspective today, the question is how can I handle this transparency requirement, how will it impact my cost, how should I restructure my fund - not whether I like or don't like it," Lawrie told the AVCJ Forum in Hong Kong. "It's a debate which you would have had six or seven years ago, but now it's already too late. It's more about making sure that your model is adaptive and as inexpensive as possible to comply with the transparency requirement."

Other PE players concur that communication is vitally important in the industry today - the most important communication in their case being that between GPs and their stakeholders, including LPs, regulators and the media. However, these strategies are not uniform. The key factor is tailoring the approach to the needs of the market in which one operates, and being consistent once the strategy is chosen.

As a private equity firm, I think we hesitate to get too actively involved on the media side, just because of concerns about appearing to be marketing to investors - Josh Porter

Trying to plan an approach to communication can be a daunting task for a GP, with valid reasons for and against a range of choices. In addition, trying to determine other firms' plans can be difficult; they will likely be unwilling to discuss their strategy, which of course can itself be part of the plan.

"Everyone has a strategy in place. They may say that they don't, but that is their strategy," says Niklas Amundsson, managing director of Hong Kong-based placement agent Monument Group. "For GPs that are filled with confidence and feel they can lead with their track record, their communication strategy might be not to communicate. And so that creates a little bit of mystique around the brand and the fund."

Keeping secrets

Of course, there are reasons for a GP to withhold details that have nothing to do with cultivating mysticism. Managers have to deal with potentially deal-breaking information, and the more people have access to that information, the more likely it will leak to a wider audience, either accidentally or deliberately.

However, a pattern of secrecy can damage a firm's image as well. In 2014, several prominent GPs settled a lawsuit in the US accusing them of conspiring not to outbid each other on certain takeovers. Though The Carlyle Group agreed to pay $115 million in the settlement, the cost was borne by investors in Carlyle Partners IV, including several US public pension funds.

Many pensioners were not informed due to the LPs' confidentiality agreement. Regulators have complained that putting public pension money into what are essentially secret accounts for high-risk investing violates the spirit of open government.

The question of openness regarding public funds worries fund managers as well, though for the opposite reason. "Our basic position is, LPs are our partners. We share as much as we can with you, and we're more than happy to do so," says Brian Lee, general counsel for China-focused GP FountainVest Partners. "But sometimes we face problems, like when we have US pension funds, which are regarded in the US context as government bodies."

Categorizing public pension funds as government entities is a matter of more than semantics. Public bodies in some states are subject to the Freedom of Information Act, and may have to reveal confidential information on request. This creates an even greater incentive for confidentiality on a GP's part.

Managers can temper demands for transparency by being seen as accommodating to investor concerns. Maintaining a good relationship with LPs can go a long way toward building a positive image. If investors believe the GP is willing to share what information it can, they tend to be more forgiving when managers hold back on some details. In particular, being able to treat individual investors' requests for data as important, even down to a small piece of information.

"It might be something that up to now was completely irrelevant, but all of a sudden someone filling in an internal monitoring report needs that number," says Monument Group's Amundsson. "There might be only one guy out of 25 LPs that needs that, but that's really important to him. And unless he gets that number, he's going to be really annoyed."

Potential antagonism

Conversely, if LPs believe a manager is willfully or unnecessarily withholding information, they may be far more demanding of openness during the regular annual, semiannual or quarterly review periods. This is not a minor concern; in a survey of 102 global LPs conducted last year by IAG and UK-based fund manager Thompson Taraz, "concealing bad news from investors" ranked second out of 24 reputational risk and environmental, social and governance issues.

Not only can a heightened level of scrutiny during review periods require GPs to reveal sensitive information anyway, it fosters an atmosphere of distrust between managers and investors, and can backfire on a firm in the case of bad news. Investors might wonder why they should put up with demands for confidentiality if a GP's investment strategy does not work anyway.

Of course, a limited-communication strategy is not always a matter of choice for GPs, particularly for smaller funds. Unlike global players, which typically have more resources to spare for constant investor engagement, regional and single country managers have to ration their assets more.

"You get a nice Excel spreadsheet, everything's in order. Somebody behind that has to do the work," says Lee. "We actually have six people in our finance team, which is running all those numbers daily and slotting them into all those Excel spreadsheets."

However, whatever justifications a GP might have for limiting communication, the impression this approach creates can still damage its image among stakeholders.

An issue of accountability

In many ways, GPs no longer have a choice in the matter of communication; pressure from many quarters has mounted over time for ever more transparency. Crucially, this expectation encompasses more than just openness with LPs. Regulators demanding accountability from fund managers who are seen as deliberately retaining information that might reflect badly on them, and even ordinary citizens who are concerned about the impact of the PE industry on the broader economy, have raised issues regarding industry transparency.

A communication strategy must take these other factors into account and attempt to protect a GP against negative perceptions on a larger scale. One way to do this is to reach out to the news media. While a manager may dislike the loosening of control this brings, Edmond Lococo, senior vice president at ICR and leader of the firm's Asia public relations practice, argues that GPs need to understand that the increased public scrutiny under which they operate has changed the dynamics of relationships.

"If you're a company that relies on capital markets, you're married to those markets. Well, think about your own marriage. How often do you talk to your spouse?" Lococo explains. "If you're only talking when you crash the car or you're buying a house, you don't have the right kind of communication strategy with your spouse. If you're married to the capital markets, it's the same. You have to be talking to them at all times."

Pursuing good relations with the media can benefit GPs in a number of ways. Some managers find third-party sources to be a handy way to disseminate information without having it linked directly to them. Stakeholders may be skeptical about positive news that comes directly from a manager, for obvious reasons; hearing it from a trusted outside source can help overcome that doubt.

Josh Porter, managing director with Japan-based GP Advantage Partners, remembers pursuing a potential investment opportunity in Nagoya-based coffeehouse chain Komeda in 2008. The firm's previous experience with a similar business proved decisive in negotiations with the founder.

"We could sit there and present all we wanted to him about how great we were and why he should consider selling to us, but he actually had heard through the media that we had purchased another Nagoya-based company," says Porter. "That had gone well, so he decided, if we had done well with one, maybe we could work with him on this one as well."

The firm purchased a 78% stake in Komeda for JPY15 billion ($146 million), later exiting the position to MBK Partners for a 7x multiple.

Another use of the media is to soften the blow for bad news. In this case LPs would prefer to hear the news from the manager rather than reading about it for the first time in the media; indeed, industry players say that times of crisis are when a GP-LP relationship can make the most progress. In some cases investors can value the feeling of being kept up to date more than what the GP is actually telling them.

However, for a wider audience there are ways for a manager to anticipate negative developments and subtly shape the conversation in advance of the announcement.

"If a firm knows that there's a closing coming up, and that the numbers are going to be disappointing, someone might leak information that this is going to be a really disappointing first close - ‘We're not going to get to $1 billion, it's going to be $800 million.' Then all of a sudden the close happens and it's actually $900 million," says Amundsson. "So the headline reads, ‘First close stronger than expected demand.'"

A manager may also quietly reduce the hard cap of its fund to bring it in line with the expected close, then announce that the fund has closed at the cap in an effort to emphasize a positive message.

In house or out?

The more effort a GP expends on these matters, the more of a strain it will feel on its own resources, leading back to the question of priorities. While the need for a coherent communication strategy is clear, its relative separation from a GP's perception of its normal duties can understandably lead an overworked manager to push some of these responsibilities onto other shoulders.

The argument for outsourcing public relations issues is obvious: it frees up a manager's staff to focus on more directly investment-related matters. Especially for a smaller GP, the staff will likely have little experience or desire to take on PR work full time, but a full-time approach is indispensable if a manager's communication strategy is to be effective.

However, caution may be warranted before taking this route as well. Bringing in an outside manager inevitably requires the ceding of some control. Firms that go in this direction must make sure that the manager hired is clear about the strategy that they wish to follow.

Many firms pursue a mixed strategy, keeping charge of the public messaging for the most part but turning to an outside house in crisis situations. Advantage's Porter recalls a time when another restaurant in its portfolio had an outbreak of E.coli and the firm brought in an external communication team to manage the social media response.

"We work pretty closely with a PR firm in those types of situations," he says. "They do have those capacities, obviously, to manage and see what information they can get out there that is more factual and based on data as opposed to just rumors. But it is a good question, whether we should be more proactive. As a private equity firm, I think we hesitate to get too actively involved on the media side, just because of concerns about appearing to be marketing to investors."

In some situations, an outside manager is essential. IPOs, for instance, require intensive focus on the market in which a company is to be listed that GPs, particularly smaller managers, will be unable to provide. When ICR was helping a Chinese social media company with a US listing, it came up with a detailed strategy to differentiate the company not just from its domestic peers, but from its US competitors as well.

The possibilities for outsourcing have their limits, though. Particularly in the field of LP relations, there is no substitute for direct communication. GPs that can make an investor feel in the loop and appreciated, and that appear to be proactive on resolving their concerns, are highly likely to retain a positive impression.

"If there are some surprises of a negative nature, I think the most important thing is to be as transparent as possible and communicate with your LPs at the earliest you can," says Samena's Lawrie. "And then you try to turn it around so that the negative surprise can become actually a positive surprise in the long term."

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• Topics
• LPs
• GPs
• Advisory
• Fundraising
• LPs
• GPs
• Fundraising
• professional services
• Advantage Partners
• Fountainvest Partners
• Samena Capital