Recent years have seen various attempts to standardise reporting through templates and software solutions. However, a cookie-cutter, one size fits all approach to reporting may not be the acme of investor relations, with the use of narratives to relay intelligence proven to better convey purpose, to be more memorable and, perhaps most importantly, to connect us on a human level.
Everything has a story, especially private equity. Why a team came together, how they landed on a particular investment focus, why a certain company was invested in or how that company grew. Within these narratives, financial information can provide a snapshot, but looking at numbers alone greatly diminishes the overall picture.
Given the increased focus on financials and spreadsheets in recent years, how can private equity firms and their IR functions embrace the art of storytelling?
The first rule of effective storytelling is knowing your audience. For PE, it’s all about the investors, and LPs are increasingly demanding more qualitative information from their managers. Alexandra Daly of placement agent AA Advisors explains, “LPs have an increasingly tough job generating returns. Their relentless hunt for yield while navigating geopolitical confusion puts them under extreme pressure to make the right decisions. They have to use information fed to them by their GPs and match it with what they see around them.”
Keimpe Keuning, executive director at fund-of-funds LGT Capital Partners agrees, “We check specific assumptions and market insights with our own views and experiences. As such, our approach is to obtain a comprehensive and complete overview by combining information sources and data points.”
In today’s age of information, it’s more important than ever to pick your sources carefully. And given the pressures LPs face, it’s vital their managers feed them insights and observations they’re unable to find anywhere else. Says Andrew Harrison, head of investor relations at Silverfleet Capital, “LPs are using increasingly sophisticated approaches in how they analyse managers, and they’re taking a more in-depth view on who they’re backing. As a pan-European manager, our investors are now frequently asking us for our views on certain countries and markets.”
Of course, the explosion of ESG reporting has created a new dimension for investor relations and provides a basis on which managers can relay more than just financials. “The most fundamental shift I’m seeing is around the ESG component and the increased focus from LPs on that,” observes Harrison. “Supply chains, credibility, sustainability, health and safety records – there’s a lot more reporting on ESG processes. We do that by including ESG in our quarterly updates, as well as creating bespoke reports. Plus, I speak to certain LPs on a biannual basis on ESG-related items; it’s important we communicate the progress we’re making on our ESG work.”
Thanks to the ESG drive, these new types of information are coalescing into a broader picture. “At the end of the day, the financials reflect recent company performance as well as realized returns,” explains Keuning. “We use additional data including ESG data both in the investment process as well as during the monitoring phase. Combined this provides a holistic view on the performance of a private equity manager and the way a manager adds value for our clients.”
For many small and mid-cap houses, many of which lack a dedicated IR function, providing market commentaries and observations might seem arduous and even unnecessary if the fund is generating decent returns – after all, that’s all that matters, right?
In response to this, Silverfleet’s Harrison says: “Is this an onerous task? Or is this a partnership? It’s important we keep our investors updated on how we’re doing; it’s about the long-term relationship. We should be working together on everything. They supply the capital and we supply the investments. We can’t lose sight of the fact they’re interested in where their capital is going. It’s a mindset.”
Indeed, while creating a narrative around activity may seem superfluous, this kind of dialogue is vital for maintaining effective relationships with LPs. “As we have built long-term relationships with our global network of private equity managers, we also get a good understanding of market developments through our dialogue with them,” says LGT’s Keuning.
But more than that, using stories as a means of reporting can go beyond strengthening relationships and securing re-ups. Says Daly, “The holy grail of distribution is a consistent investor base; working with LPs who will be with you as long as possible. How does that happen? Through dialogue. By speaking with LPs and asking them what they see in the future. Ask them the question. Find out what they see in five years, is it risk or preservation?”