The Covid-19 pandemic is presenting unique challenges to all sectors of the economy, and the private credit industry is no different. While managers are firstly, and rightly, focused on evaluating the impact to their portfolios and the investment risks, and potential opportunities, posed by the situation, it is also important to take a thoughtful approach to communicating with key stakeholders including investors, borrowers, sponsors, rating agencies and employees. The firms that do so will not only be better positioned to weather the crisis, but to come out on the other side with deeper relationships and a stronger brand with those stakeholders.
Nailing the Narrative
In formulating the messaging that will underpin any communications, managers will be well served by identifying and articulating the differentiators in their business model and approach that are strengths in the current environment. These might include focusing on (or avoiding) certain industries, a preference for more senior and conservative loans with strong documentation, a strong balance sheet and capital structure, alignment with leading sponsors, or management track record and expertise.
After setting the table with the firm’s condition heading into the maelstrom, the next step is to lay out how it is responding. This should acknowledge the focus on monitoring and supporting current borrowers, but also that the firm is open for business, prudently deploying capital and potentially even identifying and pursuing higher return opportunities given the dislocations in the markets. This is also the time to address any steps the firm may be taking such as raising capital or emphasising (or de-emphasising) any elements of its strategy.
In addition to the strategic and financial elements that set one firm apart from another, firms can also stand out by how they support their portfolio companies and communities. While deciding how to address the inevitable stressed and distressed credits in portfolios will rightly be driven by business considerations, how those actions will be interpreted by allocators, sponsors, communities and even politicians are important business considerations themselves.
In that vein, to the extent managers are taking steps to support and work with their portfolio companies, they should consider using proactive communications to ensure they are getting credit for this. Managers’ records in this crisis will be defined not only by their investment performance, but also by how they treated their stakeholders.
Telling Your Story
Many managers, especially those with public vehicles, have published letters addressing the situation and the topics discussed above. These types of communications are worthwhile and important, and encapsulating the firm’s positioning and approach to the situation in such a letter can serve as a strong foundation to build a more comprehensive approach.
That more comprehensive approach can and should take advantage of the full range of tools in the modern communications toolbox to ensure managers are effectively reaching their stakeholders while making efficient use of their professionals’ time so they can focus on managing the portfolio through this crisis. This includes engaging with the media to proactively tell the story, deploying owned content such as videos, infographics and whitepapers, leveraging social and digital media to amplify content with targeted audiences, and staying connected by conducting virtual investor meetings and employee town halls and participating in virtual conferences. For those managers with publicly traded vehicles, first quarter results will be a key touchpoint with investors and there should be especial care paid to discussing how the firm is navigating the pandemic.
Protecting the House
In addition to proactively communicating their positive messages, firms also need to prepare to manage distress in their portfolio. There will be a surge in restructurings and bankruptcies and managers need to formulate a strategy for communicating around these issues early.
As a first step, where appropriate firms should describe their workout expertise and articulate a view on how that will add value and drive improved recoveries in distressed situations. Managers will need to be thoughtful not only about communicating with investors regarding problem credits in the portfolio, which while many have dealt with occasionally, will now be happening with greater frequency, but also how to manage the fallout around job losses and other negative impacts on communities.
Furthermore, in certain cases, private credit firms may find themselves in the throes of a contentious restructuring, where they could be squaring off against adversarial players in other parts of the capital stack or a truculent debtor. In these cases, firms need to be prepared to vigorously defend their interests, both in bankruptcy court and in the court of public opinion, and they should not discount the importance of a cohesive and compelling narrative as well as strong relationships with relevant journalists and publications.
This is the first true global crisis the industry has faced at anything near its current size, and it is one of the most difficult to have confronted not just the financial sector, but the global community at large. Private credit has an important role to play in supporting the economy through this turbulent time and powering its eventual return to growth, and those firms who communicate most effectively through the crisis will be the ones that emerge stronger and more well regarded by their investors, borrowers and other stakeholders.
Josh Clarkson is a vice president at Prosek Partners