It was my pleasure to sit down with another veteran investor relations professional, industry cornerstone Michelle Noyes, managing director of the Alternative Investment Management Association (AIMA).
Our discussion considers current and best investor and prospect communications practices for fund managers at this time of economic uncertainty due to COVID-19, when more transparency is in demand, and in-person engagement is almost non-existent.
Remote communication methods define this period, for a funds industry that leans heavily on in-person engagement for ongoing relationship management and ever longer and more robust due diligence processes pre-allocation.
Vailakis: Michelle, thanks for agreeing to connect with the Alternatives Watch readers, to share your thoughts around fund communications practices at this uncommon time.
I’ve recently heard of remote annual meetings and ‘FaceTime’ portfolio company site visits — methods that only a very rare chief compliance officer would approve in the past.
Given the heavy reliance on technology platforms like Zoom for GP/LP communications, relative to the prior regime of relatively tight control over information transmission methods outside the protected firewall and (generally few) approved digital channels, what is the sentiment amongst managers and allocators in the AIMA community?
Noyes: LPs in the (largely) hedge fund focused community that AIMA represents tell us that transparency has been excellent through this challenging time, and there is a widespread sense that everyone involved is ‘making it work’ while beholden to sweeping multi-jurisdictional shelter-in-place orders. Allocators are getting the information and answers they need remotely via email, video conference calls, secure data rooms and other technology platforms but while they have the data, few would say it is an equivalent replacement for in-person engagement. Allocating to a fund manager is, in large part, about gauging in-person leadership dynamics, strengths and weaknesses. Operational due diligence professionals are getting the information they need to facilitate allocations, but caution that Zoom will be a complement rather than a wholesale replacement for site visits once they can get back in office safely.
Vailakis: It’s my understanding that allocators are fine investing at this time if most of their due diligence process was conducted in-person and they are happy enough with the level and quality of remote engagement at the tail end due to current constraints, but that ‘all digital’ processes with new fund managers are unlikely to yield new fund investments as readily.
Please speak to what you’re seeing and how this may impact newer, more emerging managers in the long run vs. blue chip more established managers.
Noyes: You’re correct in that much of the current workflow is finishing up underwriting that had already been in process pre-crisis. However, given that travel bans and social distancing might preclude site visits throughout the end of 2020 or longer, allocators do acknowledge that they may have to invest without a face-to-face meeting. This is likely to favor established managers where investment consultants or peer LPs have already conducted on-site due diligence. This will create additional headwinds for emerging managers who have not had the opportunity to go through the same prior vetting, although allocators who specialize in early stage managers stress that they are still open to these opportunities. Emerging managers will need to ensure all their “t”s are crossed and “i”s dotted as missteps that might have previously raised an eyebrow could now completely derail an allocation in this environment.
Vailakis: With respect to conveying market performance and valuation information to LPs, whether at the trading position, trade pool or portfolio company level, please speak to current challenges and communication frequency.
Noyes: Investment managers are stepping up to not just provide portfolio transparency but also to be knowledge partners during this crisis. They are sharing market updates through regular calls, webinars and written commentary. Conversations with allocators and industry polls reveal a high level of satisfaction with GP communications during this period.
In general, it is better to err on the side of more communication so long as you are treating all investors fairly and can provide these updates consistently. So, selective disclosure is a significant concern right now, but so is the concern of continued obligations to update if too much information is provided. You want to provide enough information to reasonably update your investors and prospects, but not so much that it causes additional concerns or update obligations. Therefore, it is important for IR professionals to work closely with their colleagues in compliance.
With respect to valuation in particular — for illiquid markets, calculating fair value will be a challenge for the end of Q2. Given the level of uncertainty at March 31, fundamental credit analysis at the end of Q1 was extremely difficult. From a valuation perspective, investors sought to calculate an appropriate discount rate adjustment given the issuer, sector and level of COVID exposure. Q2 is expected to be very different. Of course, a vast number of uncertainties remain, yet businesses are publishing 2020 re-forecasts. Therefore, the Q2 valuation process is expected to be quite labor intensive as fund managers review their portfolio borrower by borrower. Attention must be paid to the risk of double counting — one cannot simply layer credit analysis on top of a broad discount rate adjustment as some of these factors will be already accounted for.
Vailakis: I tend to think of investor communications as being best when executed clearly and directly, not providing false expectation of an unlikely rosy outcome, but not being overly negative or indulgent either. Sticking to ‘the script’ and the facts, cogent analysis and level-headedness, so as not to generate undue concern about more minor points or to avoid liability, is the best method.
All that said, COVID-19 has thrust us into each other’s living rooms and family spaces. There are very personal health, familial issues and indeed potential or realized market losses looming for people and firms, that have led to more human and empathetic engagement across many industries. And indeed, this is a relationship business at its heart, along with being a performance business in simplest terms.
What are you seeing with respect to this topic of communication tenor and perhaps, empathy?
Noyes: Yes, it is critical to strike an empathetic tone that remembers there is a health and economic crisis behind market moves. “I hope this finds you well” is likely an overused phrase in emails these days however it has never been more important for IR professionals to harness a high EQ along with their technical expertise.
In addition to triaging their current portfolios, many allocators are also juggling stressors on the home front and/or challenges in the institutions or family businesses their investments programs support. Therefore, time is increasingly at a premium. So, in addition to being empathetic, messages should be clear and concise. Follow-up is appropriate, aggressive chasing is not.
Finally, as you point out, now, more than ever, relationships matter. It is easier to nurture an existing relationship over Zoom than to create a new relationship without ever meeting face-to-face.