Amid the ongoing Coronavirus crisis, our Head of Investor Solutions, Hugh Stacey, caught up with Karl Bradford, a legal director at Foot Anstey LLP in the UK, to discuss on the impact of COVID-19 on fund managers. Karl has particular expertise in the structuring, establishment and running of private investment funds, and recently penned an article outlining four areas for fund managers to consider in light of the pandemic.
In your recent article, published 18 March, you mentioned that investor due diligence meetings are likely to be delayed, leading to a ‘wait and see’ approach on the part of investors. With even greater travel restrictions now in place, are there any workarounds to in-person due diligence exercises that the industry is actively considering?
Although many investors are adopting a ‘wait and see’ approach in terms of making an investment, now is actually a good time for them to be carrying out due diligence. Fund managers are likely to see a rise in the amount of questions asked, with investors taking a deeper dive into the due diligence information that is usually collected; especially around track record, existing portfolio resilience, pipeline and details of the operational systems. Fund managers should be ensuring that the due diligence information it holds is comprehensive, up-to-date and appropriately verified.
As for workarounds, we are seeing people embracing conferencing facilities (both telephone and video conferencing) as the new norm in place of what would have been in-person meetings. There are many platforms offering large meeting sizes, presenting options and even virtual breakout rooms. Interestingly, by embracing tele/video conferencing it is often easier and quicker to arrange meetings as people are able to jump from one meeting to the next without having to factor in travel time.
For investor meetings via tele/video conference, it is important to have a clear agenda and some ground rules as to how the call is managed, allowing designated times for questions and ensuring all participants have an opportunity to speak in an orderly way. Service providers can support fund managers here by offering to chair such meetings. Meetings may be recorded if all participants agree, which can be useful to recall what was discussed – although extra caution should be exercised where any specific statements are made.
With high levels of dry powder in the private equity (PE) industry, you noted that fund managers could face issues deploying capital within the investment period, as identifying the right acquisitions could prove a challenge. On the positive side, the PE industry is in an unprecedented position to make investments in social and environmental causes that reflect changing market expectations in the backdrop of COVID-19. What are your views on how fund managers can turn this challenge into an opportunity?
Environmental, social and governance (ESG) elements have become an increasingly important part of making investments. COVID-19 is an example of how large-scale global events can bring normal life to a standstill, and with the climate crisis potentially set to be the next such event we expect to see continued demand from investors in terms of social and environmental considerations.
This crisis is likely to throw a particular spotlight on the ‘S’ in ESG. The ‘S’ is often overlooked as it is the hardest to define. Social metrics include a company’s treatment of its employees, as well as its impact on wider society through its relationships with customers, suppliers and local communities. Fund managers should be considering all of these issues in order to protect brand reputation. Some companies will be solely focused on survival at this stage, but fund managers can be working with their portfolio investments to help them in applying the ESG policies.
Now is an important time for fund managers to carry out reviews of their ESG policies to ensure that they are up-to-date with the latest laws and regulations and also with what was agreed in the final fund documentation or in side letters with individual investors. Service providers can support fund managers with carrying out these reviews. Regular audits are becoming commonplace with investors increasingly drilling down into investments to understand what’s driving the ESG scores reported by fund managers and so it is important that all is in good order.
Those fund managers with capital to deploy that have, in these unprecedented times, worked on all aspects of ESG across the entire business, especially in building strong internal, business and community relationships, environmental strategies and protecting and enhancing brand reputation, will find themselves in a strong position as good deals come to the market. Such fund managers will also find themselves in demand when they go to raise their next fund.
As you highlighted in your article, material adverse change (MAC) clauses and seller disclosures are more important than ever before. What are some risk management measures that fund managers are advised to adopt in the context of live sale and purchase agreements?
It depends on what stage the transaction is in. For transactions that are in the early stages, there will be a lot of focus on due diligence and identifying gaps and risk areas. It may be necessary to reconsider certain aspects of the deal to build in more protections including negotiating terms with key customers/suppliers, escrow arrangements or, for example, making a larger proportion of the consideration through an earn-out arrangement.
In terms of any live sale and purchases, it is important to identify the risk areas and assess the agreements with two keys questions in mind:
- What has changed (for example, are warranties still correct, has there being a material change to the financial position, can obligations/conditions still be met within a required time)
- What is the position in relation to the points that have changed (including how material/fundamental is it, can it be cured, force majeure, defaults, waivers etc.).
In terms of completion of a transaction, there are practicalities around signing that need to be considered, including how to witness documents, use notaries and how and when to make filings with regulators and tax authorities while complying with the government guidance on social distancing and movement.
Each transaction is different and your legal counsel will be able to guide you as to the best course of action in the particular circumstances.
Against the backdrop of COVID-19, the significance of timely communication with investors is rising, just as the ability to physically touch base with them decreases. What are some of the measures that fund managers should be putting in place to circumvent this issue?
This is the time for fund managers to look to strengthen their business relationships with all stakeholders including investors, suppliers, service providers, management teams and lenders. When there is a crisis, what is important is how that crisis is managed, and communication is key to this.
Investors will be feeling nervous about the impact of COVID-19 on their investments and so it is important for fund managers to be in regular contact to explain the impact and measures being taken to mitigate such impacts. You want your investors to know how much effort is being put in to protect their investments. It is, however, important to ensure that all information is disseminated in a clear and focused way, rather than bombarding investors with regular emails updating on the latest position. One of the best ways to do this is to use online information reporting portals. By keeping these as up-to-date as possible investors can access the latest information at their own convenience.
As mentioned earlier, arranging virtual meetings with investors is important. It may be a good time to increase the frequency of such meetings, at least in the short term.
As a final point, fund managers may themselves experience business disruptions. Services providers are in an excellent position to be able to support fund managers in ensuring business continuity.
As more and more economies engage in strict measures to prevent the transmission of COVID-19, from curfews to full lockdowns, how can fund managers ensure that work disruption is minimised even as the health and safety of employees is given the importance it deserves?
Fund managers are in a unique position to coordinate across their portfolio companies to ensure that each is able to access the applicable government schemes that have been, or are currently being, put in place in the relevant jurisdictions.
The current crisis has shown the vulnerability of certain systems and also brought the realisation that there could be similar disruptions in the future. Fund managers should discuss with the portfolio companies which technologies are going to be the best investment in the short, medium and long-term to ensure business continuity. In the real estate sector, for example, some managers are already utilising 3D mapping tools, which can be used by a single operator. Once completed, 3D maps can be used to allow investors to take virtual tours of buildings, architects to review schemes and surveyors to take measurements. Such tools will become more commonplace in business and can be put to a wider use in innovative ways.
Many actions can be taken online but some will still require physical presence. In these circumstances fund managers should work closely with portfolio companies to analyse the risks and put in place common sense processes to ensure the health and safety of employees at work (including provision of sufficient equipment and minimising social contact between employees). Health and safety policies will need to adhere to applicable laws and regulations and be updated in accordance with any temporary measures adopted by different jurisdictions.
For the reasons covered earlier regarding ESG, a fund manager should look to consistently apply health and safety policies across the portfolio and use best practice. Law and policy are playing catch-up with the ever-changing reality at present and so judgements will need to be made about best practice in the spirit of the guidance available. Mental health of employees will likely come into stark focus over the coming months as the toll of the lockdown begins to realise itself.
Do you think that given the slowdown in activity, it is the right time for fund managers to focus on operational efficiency?
Operational efficiency is an important aspect of fund management at any time. No fund manager wants to eat into the returns unnecessarily. After the initial hiatus now is a sensible time for fund managers to carry out a top down review to evaluate all operations in the fund.
The challenges presented by COVID-19 will have highlighted the particular areas in a portfolio that are under stress. Attention should obviously be given to these risk areas going forward but there will be other ‘easy wins’ in terms of cost and time saving efficiencies.
Data is a key aspect. It will be a good time to explore the data in more detail, consider improving the types of data that is collected and understanding what information can be obtained. This will increase efficiencies and also allow for greater transparency with investors going forward, which will help to solidify those strong business relationships.
Furthermore, it may also be a good opportunity to take advantage of relevant online training tools so that the workforce is in as good as position as possible when the current crisis is over.
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