18 March 2020
First things first, while healthcare providers are at the centre of the COVID-19 pandemic, we are safely working from home. Not to forget the factory workers, working double shifts to produce masks, sanitizer and ventilators and the delivery and supermarket employees who are taking unpaid risks.
Every second counts in this situation. We are socially – and in some places legally – obliged to reduce the spread of the Coronavirus through social distancing, i.e. staying at home. Like any other organisation, private markets fund managers (private equity, venture capital, real estate, private debt and infrastructure) need to dramatically adjust their modus operandi.
While the drastic measures of social distancing are absolutely necessary to avoid a total collapse of our healthcare systems, fund managers still have a fiduciary duty towards their clients and need to continue to fulfil legal and regulatory obligations.
While every institutionalised manager selection process covers business continuity plans, these usually focus more on shorter-term risks that result in infrastructure challenges like electricity cuts, offices being inaccessible or servers being down. We are now facing a crisis that forces the entire industry to work from home – including key decision makers and all our stakeholders (from LPs to lenders and banks, fund service providers to legal and tax advisors) – for an indefinite time.
The current pandemic is also different, as it requires fund managers to proactively decide, opposed to being forced to work from a disaster recovery site as a result of a natural catastrophe for example. Public and private organisations in the western hemisphere probably didn’t have the necessary experience to take informed decisions and balance between the known operational risks and the necessity to aggressively tame the spread of the virus through social-distancing.
On one hand, fund managers knew that instructing their entire workforce to work from home could result in severe disruptions to the ongoing functioning of their organisation. On the other hand, the instruction to work from home became a social and moral obligation.
The learning curve was steep and the aggressive decisions have been made. It seems that the majority of the financial sector is working from home by now. That said, fund managers still need to meet their fiduciary duty towards clients and fulfil their regulatory obligations.
Investments and portfolio management
While the current uncertainty seems to paralyse some, others sense a buying opportunity. Private markets are a people’s business and video conferences cannot entirely replace personal meetings. More importantly, managers are focusing on managing their portfolios rather than making new investments. Those who want to invest, will find it difficult to put in place the financing. Deal activity will further decrease until it picks-up again.
Although the fund terms allow managers to be patient, fund managers need to closely monitor these and make the necessary adjustments in a timely manner. Fundraising and investment periods might need to be extended, vintage fund terms might not provide sufficient time to opportunistically liquidate portfolios and the currently used credit facilities might not provide the necessary flexibility.
Fund operations and back-office
The proper functioning of the fund operations and back-office cannot be disrupted. Fund managers need to ensure that their accounting and investor reporting as well as their legal and compliance processes are still functioning and fund and regulatory obligations are met. The duty to adequately supervise service providers, to assure the continuous fund administration and asset safe-keeping duties are provided, prevails.
Obviously, employees need the proper tools to work from home in the first place, but the challenges are not solely technology driven. Less evidently, the robustness of the existing processes and efficiency of the operational set-up has been put to the test. Those fund managers who have been focusing on their processes and operations had more ease to adapt and assure the continuous functioning of their fund platform to meet their fiduciary duties and regulatory obligations. Those are also the fund managers who will most adequately manage their existing portfolio and pursue acquisition opportunities rather than being obfuscated by operational challenges.
Stay safe and healthy.
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