Forum Q&A: LPs are opting into sub lines

Speaking at a plenary session at PEI’s CFOs & COOs Forum in New York last week titled “CFO and COO drill-down: Advancing the dialogue in PE,” a panel of four private equity professionals addressed some of the top issues facing the industry. Here are five takeaways from the session, which was conducted under Chatham House rules.

Sub lines: Most LPs are cool with it (says a fund CFO)

Subscription credit facilities have obvious benefits for fund managers, but apparently LPs are coming out in favor of them too. One panelist – whose process for making use of the lines he described as highly complicated – said that his firm offers LPs the choice of whether or not to make use of a subscription credit facility for their portion of committed capital. Around 80 percent of investors in the firm’s funds choose to make use of sub lines, although the CFO in question admitted that giving the option makes the process more time and resource intensive. “I don’t advocate for that, because it’s a lot of work,” they said. “In more recent funds, we’ve actually tried to push people all to borrow, which is obviously a lot easier to manage.”

Take the PE bears by the claws

We’ve already seen some criticism of the private equity industry from Elizabeth Warren, and the number of policymakers, political campaigners and Democratic Party candidates publicly pushing for industry reform is growing. “What we’re seeing in the political discourse is probably the loudest public expression of disdain for the industry,” said one of the panelists. But according to another member of the panel, there’s still a chance to turn PE’s reputation around by touting portfolio company success stories. “When you engage, when you convince policymakers that what you do has net positives for the economy, then you get the right results,” they noted. “Or at least prevent bad results from happening.”

That result was clear during November’s House Financial Services Committee hearing focused on the PE industry. American Investment Council members approached member after member of the committee, focusing on Democrats (according to a person with knowledge of the efforts), who by party affiliation are more likely to side with vocal PE critics like senator Elizabeth Warren and congresswoman Alexandria Ocasio-Cortez. There was virtually no criticism of the industry at large during the session, titled “America for sale? An examination of the practices of private funds.” Numerous Democrats demonstrated a high level of awareness of benefits specific PE firms have brought to their jurisdictions.

Retail investors: Can private equity remain private?

As PE funds open up to retail investors, GPs are going to have to adapt the way that they disclose information about investments and performance to LPs. Can banks and brokers acting on behalf of pools of retail investors be trusted with sensitive information? “You do need to think about whether the bank is going to want you to disclose your private equity information and portfolio company information up through to their fund investors, some of whom may work for competitors of your company,” said one of the panelists. “It’s something that takes the ‘private’ out of ‘private equity.’”

Tech implementation is a priority, but… 

Investor reporting is the key area of focus for the application of new technologies for many firms, which is why some of the difficulties in implementing it come from trying to consolidate portfolio company data. “Technology is definitely at the top of the priority list for our firm,” said a CFO. “It’s just a matter of trying to get the resources in place to actually drive some of these things to completion.”

Cybersecurity threats evolve, and so do regulatory expectations

The level of sophistication that the Securities and Exchange Commission expects in terms of cybersecurity, both at the fund and the portfolio company levels, has increased and will continue to do so. “This is going to continue to be a bit of a moving target,” said one panelist. “What the SEC wants you to do is ever-evolving, just as the cybersecurity threats and risks are ever-evolving.”