Getting to know you

The long-term, illiquid nature of private equity means that strong relationships are vital to successful LP outcomes. So how are investors building these in emerging markets in a post-COVID world?

Relationships have always been fundamental to the private equity model – GPs are, after all, asking their LPs to commit to what is usually a blind pool of investments over a period of 10 or more years and, while new approaches are developing, the asset class is largely illiquid. Solid foundations, built on trust, are therefore essential.

“It’s super-important to build relationships,” says Marleen Dijkstra, Principal, Primary Fund Investments at AlpInvest.

This has never been more true than in today’s market when GPs are facing a raft of headwinds, such as inflation, rising interest rates, geopolitical risk and falling valuations. Commitments to new relationships may therefore be more challenging, but many LPs appear keen to continue seeking out new talent in a bid to keep their forward calendars full.

“This is a long-term game and you need to build relationships over a long period. That means you have to engage in conversations well before you commit because that will tell you more about the people you are investing with than one or two meetings. Trust can only be built over time.”

Marleen Dijkstra, Principal, Primary Fund Investments at AlpInvest.

“You used to have three to four days allocated to meeting the portfolio teams. Now, the new normal is to take a longer approach and meet different individuals in different departments virtually and/or in person – that’s a healthy development.”

It can also save time. “If you can’t make a meeting, it isn’t postponed for several weeks,” says Janssen. “It can be arranged for later in the week and that makes communication so much easier.”

LPs still want to meet new GPs in person, but the adoption of video calls has made regular contact much more possible. And this may be facilitating other aspects of due diligence – the more professionals are able to interact, the more connections become apparent.

“We’ve seen a considerable increase in reference checks over recent times,” says Chirila. “We have a vast portfolio and we often only have two degrees of separation between us and new opportunities – we can often do reference checks that way.”

“The market correction is giving us an opportunity to pause and look at the world,” says Amal Enan, CIO at the American University in Cairo Endowment. “We are focused on our existing GPs right now to ensure that they are surviving and able to generate returns for the future. However, that doesn’t stop us talking to, and getting to know, new managers. We won’t pause for ever, but especially in times like now, we have to focus on quality – and that means we have to know the managers we back really well.”

The migration of meetings to the virtual world since the pandemic struck has certainly helped with this. Many LPs were not comfortable with full remote due diligence models for new relationships – as George Janssen, Senior Investment Manager at FMO says: “We found it was possible to do virtual due diligence, but it was restricted to very much to relationships we already had.” However, virtual meetings have certainly helped with building initial contacts with fund managers and getting to know teams without the need for several trips.

“The due diligence modus operandi has changed,” says Marius Chirila, who covers emerging market private equity allocations at the European Investment Bank (EIB Global).

It certainly looks as though the hybrid approach to getting to know new GPs is here to stay – it can cut costs and build deeper and broader relationships, while also increasing efficiency for both LPs and GPs over long distances. However, GPs hoping that it might offer a short-cut to commitments are likely to be disappointed. As Dijkstra points out, there is no substitute for patience. “We want to make sure we have enough meetings spread over time so that we can grow into the relationship together,” she says.

That way, you can gauge whether things have happened the way GPs have said they would, and if they haven’t, how GPs reflect on that."

When it comes to managing ongoing relationships, one fund manager has taken an unusual approach to forging strong ties with its investors – secondments, alongside sector information sharing. Hydrogen-focused fund AP Ventures has a mix of five financial and seven strategic investors, all of which are interested in co-investments. Penny Freer, AP Ventures Chairman, explains how this works.

“Our model is very LP service-driven. All our LPs can send a secondee to work alongside us; they normally stay with us for at least 18 months and, in some cases, several years. Our secondees operate as investment managers on our team. They help find and execute deals and they work with portfolio companies. They are also responsible for finding links back to their own organisation for portfolio companies. We are seeing cross-fertilisation across the whole partnership as a result of this – we’ve been able to introduce LPs that didn’t know each other and we’ve seen them enter partnerships and projects together. We are helping to develop an ecosystem around hydrogen.

“If LPs are unable to send a secondee, we’ll allocate one of our investment managers to liaise with the LP so they have a point of contact at all times, plus one of our partners speaks to each LP regularly. We share all our pipeline information with our investors on a weekly basis and we share our research on the sector.

“As a result of all this, many LPs see us as an extension of what they do in the hydrogen value chain. Our strategic investors look to us as the tip of the spear of hydrogen sector opportunities, so it’s really important that we provide them with the intelligence they need. Financial investors are also keen to understand how the market is developing and we organise workshops to provide this intelligence. We had initially thought that financial investors would not have such a strategic angle, but we’ve found they too are keen to develop a close working relationship, co-invest alongside us and provide project support where needed.”