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Posted over 13 years ago

Raising A Fund? Transparency Is Key

A common theme in many of my blogs has been that the need for GPs to understand and adapt to the changed environment that has occurred in the world of private equity is paramount to their success in attracting equity. I discussed how LPs have indicated in various surveys that while good performance generally leads to a service provider being selected, failings or lack of attention in other areas could result in the loss of a mandate.  Investors' expectations of the quality of communications and of the timeliness of reporting has changed. 

LPs have now had time to digest the economic turmoil that has engulfed their investments over the past two years. They have become smarter and more savvy about the risks of underlying investments and have stepped up their demands in one area more than most: TRANSPARENCY. 

But what exactly does that mean and to what level is a GP expected to be transparent? Understanding that a communications program that one GP may consider sufficiently transparent may be inadequate to another, the challenge then becomes to understand what the LP community, in general, is asking -- or should I say telling -- GPs to do in order to secure their investment dollars. 

Let's examine some aspects of increased reporting and communications, stronger governance and better risk and control processes that LPs are seeking to build increased transparency around:

1. LPs' expectations regarding the level of reporting is truly a hot button. Many funds in the past found it sufficient to simply provide quarterly and annual updates. This largely is no longer the case, as communication requirements have increased significantly. Investors want to know if the fund manager's processes and operating systems are capable of providing a higher level of accurate and timely reporting. 

2. Greater and more meaningful access to members of the investment team is also a byproduct of the recent global financial crisis that is critical to LPs. LPs want private equity executives to drill down the numbers. There is an increased appetite for information not just at the fund level but at the asset level as well. LPs want to see reports, financials and regular updates on variables such as vacancy rates and effective rental rates.   

3. With ever-increasing regulatory and financial rules and regulations being implemented, investors want to know if the fund manager's business model can adapt and flex quickly to changing market conditions. Being nimble in this market is key to long-term success.

4. Investors are becoming more vocal about risk and control processes and want to know if the fund manager understands all of the risks involved, as well as how they will be controlled and managed. Transparency around risk mitigation procedures is definitely a plus. 

Investors will continue to push for transparency and for more information from their managers, in part because the LPs themselves must meet higher and more stringent reporting requirements. An executive of a large private equity buyout firm recently reported that LP information requests skyrocketed tenfold between 2008 and 2009 -- from 100 to 1000 -- and are continuing to grow in 2010. 

With all of these changes in the markets, it is of critical importance to ensure that your fund's operation is set up for success and that detailed attention is given to your investor relations functions. This is a critical area that can not be understaffed or undermanaged.  

 

Sagar A. Dalal is the co-founder and managing principal of Beckerman’s real estate fund advisory division. The division works with real estate fund managers by advising on all aspects of the private fund placement process including fund structuring, competitive positioning and market assessment, preparation of fund-related documentation and providing expert fund communication advisory services to fund managers to ensure a productive and successful relationship is maintained with current and prospective investors. He can be reached at [email protected].


Comments (2)

  1. great stuff Sagar. Its been a while since I have read one of your posts, but I really enjoy your writing!


  2. Nice post...I really enjoy your commentary. LPs seem to be opening up a bit in our neck of the woods.