A people business that will have to change

One IR professional sister title Private Equity International spoke to recently said there is only one limited partner on their book that they have not met face to face. “I am in fact making a detour of a hundred miles or so when on holiday in a few weeks just so I can meet them, look them in the eye, have a coffee and hopefully bump fists or elbows in absence of shaking hands,” they explained.

The exec has successfully completed on $1 billion in commitments to their firm’s latest fund during 2020.

Such is the business of private equity; personal connections matter. It is an idea that kept surfacing at recent virtual IR, Marketing & Communications Forum. IR folk are worrying the pandemic-induced move to online vs in-person meetings could change private equity from a “character-driven, relationship business to a ‘what are your returns?’ [business]”, as one senior IR exec put it. In an earlier panel, an LP had dismissed the idea that they could ever make a commitment to a GP without an in-person meeting: “Our model is extremely people oriented.”

You could take a dim view of an industry in which personality plays a part in fiduciary decisions. As Mario Giannini, chief executive of Hamilton Lane says: “One of the amazing things about this asset class is, for some LPs, returns matter so little relative to other [factors]. It’s a bad thing that people are making decisions based on ‘I like or I don’t like Mario’. It’s not sustainable.”

The flipside, Giannini adds, is that it can’t all be quantitative. Even with a burgeoning secondaries market, private equity is an illiquid market and relationships last decades.

And as the holiday-interrupting IR exec tells me, a good relationship will “absolutely not” sway an IC decision as to whether to invest: “But we are social beings and it’s the right and proper thing to do in my mind.”

For investors, on-site and in-person meetings are not about working out whether they “like” a GP. They are an additional realm in which to pick up what one investor describes as the “grey” red flags. Is the managing partner too dominant? Is the story consistent? These are harder to discern over Zoom.

When it comes to the pandemic, initial human optimism is giving way to the realisation that we may be sitting here a year from now without a vaccine, travel still curtailed and offices half-empty.

“Extremely people-oriented” investors will have to adapt, because not investing is – for most organisations – not an option. Investors don’t want to miss out on a vintage; and for funds of funds, investing is what they are paid for.

When it comes to conducting fund due diligence, data rooms and reference calls remain the same whether you are in the home office or conference room. The question for investors is whether they can find new ways of identifying those “grey” red flags or risk investing without that last layer of comfort.