Understanding Communication Expectations of LPs Is Critical

There is a heavy focus given to financial terms and conditions as GPs structure their funds in this economy. The balance of power has clearly shifted in favor of the Limited Partner community and, as I have written in previous posts, the days of funds loaded with fees and splits heavily favoring GPs are history. However, focus on the non-financial aspects of a fund's operations is equally if not more important in today's time. Poor communications and GP opacity are now genuine reasons for LPs to pass on commitments to new funds. In a survey conducted of LPs in reaction to the events of the recent financial crisis, 53% indicated that they will or already have declined to invest in new fund vehicles launched be certain managers they have previously invested with as a direct result of poor communications or a lack of transparency during the crisis.

What is clear is that LPs are not satisfied with the level, quality or frequency of communications from fund managers they have invested with, especially with regard to troubled investments. Often, they were only informed about underperforming investments late in the game and generally as a blip on an investor report or a brief letter.  Close to 33% of the LPs polled for the survey mentioned above indicated that they were dissatisfied with the way they had been informed about underperforming investments. Communication experts will advise that proactive communication provides a feeling of trust and openness that keeps investors satisfied.

Some quick tips to keep in mind are 1) establish from the start what communications your LPs can expect to get from you, how often and in what detail and ensure this gets done in a timely fashion 2) communicate "stick to the ribs" returns to your investors; they want to know the bottom line percentage they will receive; 3) ensure you have an online investor portal set up where investors and their advisors, accountants, etc., can access and print pertinent fund related documents at any time; 4) set up a regularly scheduled conference call that LPs can call into addressing current happenings (eg. deals in pipeline, deals under contract, deals on selling block, etc.) and; 5) make sure you have a dedicated investor relations who is accessible, responsive and knowledgeable on all fund investment activities.

Fund managers must quickly realize and adopt an investor relations and communications strategy that reflects an understanding of their investors transparency needs. While the exact level will be different for each group, what remains constant is that the communication expectations of LPs have gone well beyond just quarterly and annual reports. With LP scrutiny at an all-time high, private equity fund managers must promptly and proactively provide pertinent information that affects an investor's investment, negatively or positively. This will help to ensure a feeling of confidence and trust in the manager and will count heavily in the LP's decision to re-up for the next fund.