This article originally appeared in the November 2009 Private Equity Manager Monthly, a monthly printer-friendly publication delivered to subscribers to Private Equity Manager.
Dan Jacobs, director at Broadgate Consultants, and Michael Henson, managing director at sister company Taylor Rafferty.
In what ways to distressed investors have to work harder when crafting a message for the press?
Dan: Regardless of your strategy, you need to differentiate what you do from your competitors. I think that gets even more complicated as you get into the world of distressed and turnaround. The reason for that is a lot of things wear the label of ‘distressed’. That can mean distressed, it can mean control distressed, it can mean control-oriented distressed, it can mean that you invest in credit opportunities that you buy at a discount, or it can mean turnarounds where you’re buying a company that isn’t operated very well and you need to turn it around.
What are some of the potential consequences of missteps in press engagement?
Michael: Once you start looking at a press strategy and announcing a deal in the media, your stakeholder concerns are almost immediately amplified. If you’re buying a company – be it publicly traded or already private – that has suppliers, customers, employees, and a management team, people who aren’t necessarily apprised of the deal or have certain views of what is going on, you need to make sure as the new owner of this company that you’re not going to destroy value by miscuing with the press…that you’re not going to drive customers away because they think that the product that they’re buying is changing, that the company that they know is going away, that your employees are going to have concerns about whether or not they’re going to have a job tomorrow, that suppliers are calling in the terms of their contracts or looking to change the terms of their contracts because here’s uncertainty about management.
What makes communication a more sensitive exercise for distressed investors than it is for their buyout-focused peers?
Dan: As the number of counterparties increases and the complexity of the capital structures increases, you have to think about striking the right balance in terms of the communications that you’re putting out there, because no one is viewing it from the same perspective. Everyone has their own agenda and things that they’ll take away from any communications with respect to the deal. You really have to be taking all of those parties into account, and the more people there are the harder that is.
There’s an additional sensitivity with respect to the management teams that you’re dealing with in these situations. When you go in, you need to make a very clear investment case to your LPs about why you’re investing in the company, and generally you’re bringing something more than capital to the table. At the same time you can’t embarrass or disparage the management team that you’re about to partner with. It’s an example of the fine line you have to walk between communicating with the investors and the management team – and if you want to position yourself one way to a potential management team, and a different way to your investors, or a source of financing, then you need to be even more controlled and careful in how you speak with the press.
Doug Donsky and Kal Goldberg, managing directors at FD
What kind of information is critical for LPs, and how often should you communicate with them?
Doug: In distressed situations, you’re essentially looking to keep your LPs very in tune with what’s going on, and you want them to be as best possible aware of the changes prior to them being reported. You’re trying not to have any surprises. Those situations are very fluid because they’re happening so quickly, and what the financial advisers and boards are looking at could literally change in a matter of days. You’ve got to increase their communications internally, keeping people apprised, before anything gets reported.
Kal: Commonly in distressed investing, it’s not usually one fund making the investment. You have groups of investors. You have some people who actually have the intention to bring resources to actually turn the company around, you have other people that are more on the other kinds of funds you mentioned earlier who are the distressed debt guys who are in there trying to make a play in case things don’t work out. And so what we’ve seen is, in the distressed situations, versus the more plain vanilla deals, you need to be very careful that you don’t have people going off message with respect to the investor group. You need to make sure everyone is on the same page, and everyone understands what’s going to come out.
How should your LP communication strategy dovetail with your press strategy?
Kal: You want to make sure you’ve got complete uniformity in terms of what they’re telling their LPs and what’s getting out into the media. You see funds use some of the same communications, and the content, and the messaging, that they’re using for their LP audiences as a mechanism of having a uniform message to respond to media issues.
Doug: Any sort of document, whether it be an LP letter, an internal draft of a release that is being put together, we would all see that as a public information these days. Even though we recognise that these are internal communications and documents, that people are putting together to help get themselves on the same page in terms of the strategy or whatever have you. We would see all these documents just one step removed from being disclosed and public, and you should be thinking that way. You should not be surprised if an LP letter is reported in the press.
Stephen Presser and Dan Collin, principals at Monomoy Capital, a $280 million private equity fund
How do communications with LPs at a distressed firm differ from a traditional PE firm?
Stephen: The biggest single difference in today’s market is in the detail and frequency of communication with your investors. As a turnaround fund, you need to be more transparent, you need to tell your LPs as much as you can about your portfolio, and you need to share both the good news and the bad news. It’s simply not enough to say “here is the multiple at which we bought this company, here is what we like about this company, now it is our portfolio.” Instead, we walk through a detailed rationale for buying a company in this recession and our step-by-step program for making the companies that we own better at what they do.
Today, our LPs want to hear from turnaround managers on three specific topics when we acquire a company. The first question is why are you buying this business – what makes it special and worthy of the scarce equity capital out there? The second question is why are you buying this business now – why aren’t you waiting until the economy recovers and gives you more clarity? And the third question is what are you going to do to this business so that it survives the continuing recession and makes money for LPs even if the economy never recovers. Those are three topics you need to cover in every communication.
Dan: In general, LPs want to know more sooner, and LPs, some of which have their own investors they have to report to, are all on the same kind of quarterly and yearly time frames we are. And the quicker a GP can publish its quarterly report and portfolio valuation, the easier it is for our LPs to communicate to their investors and stakeholders.
When looking at a potential investment or making a deal, what should you communicate and what should you keep confidential?
Dan: We buy private companies in the smaller end of the middle market, and there is not much about those companies that we are not willing to share with our investors to the extent they want to see it. There is nothing to be gained by limited disclosure. In every investment, you need to articulate, first, why your acquisition target has a reason to exist – why it is a business you want to own at every stage in the business cycle? And you then need to identify the problems with the business that you can recognize up front, and how are you going to go about fixing those problems.
After you’ve made the investment, you should be your toughest critic by comparing the actual results of your turnaround to the path you underwrote and bridging the path to ultimate returns for your investors – how you will ultimately monetize this asset once you fix it. If you stick to those basic guidelines I think you are going to make your investors happy with the level and nature of communication.
The last 12 months have been marked by a shortage of good news for anyone investing in a private equity strategy. However, it’s also the most important time to be transparent with your investors and to show them the path to profitability in your portfolio and returns in a stabilizing economy. Over the course of the last 12 months, we have implemented further restructuring programs at every one of our portfolio companies driven by the collapse in basic demand. We told our investors exactly what we sought to do at every company to improve profitability in the face of the recession; we have executed those programs over the past 12 months; and, on the whole, we are exceeding expectation cross our portfolio. That, in itself, is the best form of communication in today’s environment.
Stephen: Now more than ever it is important to be as transparent with your LPs both with the good news and the bad. Not everything will go perfect in this economy – either in your portfolio or in your acquisition efforts. Believe it or not, everyone understands that, including your limited partners, so there is no point in trying to sugarcoat anything.
What has changed regarding your communications strategy over the years?
Stephen: We have found that we have had great success with our limited partners by putting out more and more information. We use our internal LP website as much as we can, and we’ve gotten excited about putting up more rather than material about what we are doing on a given day and in a given transaction and restructuring. That is what we have learned over the past couple of years and it has made us a better GP.
Dan: In a sense, the recession has encouraged every private equity manager, including turnaround funds, to improve both the nature and the frequency of communications with their LPs. That is, without qualification, a good thing for the industry and we hope it continues.