Private Equity Manager and Fund Considerations in Response to COVID-19

As you navigate the challenges of COVID-19, business continuity within the private equity investment lifecycle is essential. Organization and thoughtful consideration will be crucial, as you may need to assign new responsibilities and identify champions on your team.

These suggestions and strategies cut across disciplines and skill sets, and your execution could vary depending on the underlying culture of your firm, participants in your operations, the stage in the fund’s life cycle, the stage in the life cycle of your portfolio company investments, and the industries in which the portfolio companies operate. Consider this guidance when looking through the lens of our new normal.

From an entity perspective, the manager or general partner of the fund has fiduciary responsibility to the limited partner investors, including ensuring the ongoing operation of the fund. To devise an effective plan, review these four areas for assessment and execution.

Start with your team

Assess your team’s ability to continue supporting fund operations, portfolio company investments, the sourcing and vetting of investment opportunities, capital call timeliness and collections, and availability of credit. The investment due diligence process may look and feel different as we shift toward virtual connections and away from in-person processes. Consider what processes need to be changed or modified for an effective due diligence process.

Do remote team members have the tools to perform the new processes securely? Remote connectivity, video conferencing, and the ability to share documents securely (including document portals) are a must. Consider sending corporate-managed endpoints (e.g., desktop, laptop, tablet, phone) home with team members instead of allowing bring-your-own-device setups. Additionally, update acceptable use policies to reflect the shift to remote work environments.

Maintain professional relationships

Assess the ability of your service providers (fund administrator, auditor, tax preparer, etc.) to continue their services with minimal disruptions. COVID-19 disruptions may have an immediate impact on valuations, on related models and inputs, and on support that is provided to auditors, and could create potential opportunities for tax loss realizations. It’s important for you to assess whether service providers can provide seamless and connected support.

Explore additional services that service providers can implement under the circumstances, such as the ability to support you by modeling cash flow forecasting. Call upon existing service providers for additional internal accounting, bookkeeping, and CFO services, should there be operational disruptions with your key employees or with those inside the portfolio companies. Recent and future revenue — and earnings results — may be affected by a business shutdown, supply chain disruption, or overall lack of demand. Work with your portfolio companies to monitor real-time key performance indicators, such as backlog, pipeline, and other metrics, to continually reassess projections.

Review your operations

Assess the ability of your fund’s portfolio companies to continue operations as close to normal as possible. Evaluate the impact of business disruptions, markets that are slower or inoperative, and tighter credit conditions. As part of your assessment, take a second look at your internal processes and procedures for how investments are evaluated on an ongoing basis, including the impact of COVID-19 on external reporting. Consider how delayed and disjointed communication could affect your portfolio company workforce. Make sure communication protocols include clear guidelines for important business decision approvals, authorizations and payments, secure access to systems, and privacy of confidential data.

Stay abreast of changing regulations

Assess the impact of regulatory changes, including available relief provisions, on a continuing basis. Fiscal policy in the form of stimulus is moving through the political environment at an unprecedented pace. Managers and fund COOs should be aware of regulatory changes in the CARES Act, the impact of economic stimulus, and available options to assist with managing capital.

Internally, assess whether capital budgets need to be updated to reflect the changes to payroll taxes. Are there credits available to the portfolio company or fund; does the delayed payment of payroll taxes assist with capital requirements?

Human capital and workforce components are key to all of the above and are, perhaps, the most relevant consideration for actions to be taken. Assess these components with transparency and honesty to make sure remote working arrangements, funding requirements, and general disruption to national and global markets — including logistical challenges — are taken into account.

Finally, consider regulatory reporting requirements for the fund manager, either at the SEC or state level, based on the manager’s registration status. Similar to other regulators, the SEC resource page includes COVID-19 responses, which provides certain relief in filing forms ADV and PF, if applicable to your organization.

How we can help

CLA created a robust COVID-19 Resource Center to assist you with navigating the rapidly changing environment. These resources can help you lay out a strategy to put your organization on its toes versus its heels. We have published thought leadership resources directed toward operational support, regulatory and tax updates, accounting and financial statement guidance, and more.

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