Blind Pool Investing and Annual Meetings…
Just a few weeks ago, many private equity allocators and investors were gearing up for the Spring “annual meeting season,” which begins in early March and stretches through early June. For those outside the industry, these meetings are where those investing or representing investors (LPs) in private equity funds gather for an update on their investments, generally through a highly curated (often high production value) presentation by the private equity firm (or GP). The GP deploys countless resources to aggregate and produce the content but also to flawlessly execute an event for anywhere from dozens to hundreds of individual investors. [Being married to a meeting and event planner, I know the effort it takes to pull this off, which is something I sorely underestimated]. Ultimately, this event sometimes lasts half a day or as many as a few days, but it comes and goes rather quickly. Depending on the allocator and the size of their portfolio and team, there may be dozens of these meetings that they will attend each ‘season’ (spring and fall are the two ‘annual meeting seasons’). We listen intently, network and chat with the GP, produce notes that capture the updates and give some of the flavor of the meeting, race to the next one, rinse and repeat.
Our current situation, which has us all switching from ‘flying in’ to ‘dialing in,’ got me thinking. We’re relegated to working from home, which is a plus for some and a Herculean task for others, but by and large, we are ‘making it work.’ A virtual working environment is not only plausible but also has the potential to become the norm. And while virtual can be effective (and I would argue more efficient), you can’t overlook the value of human interaction. That is what I believe we should be focusing on when it comes to annual meetings. Indeed, content is essential, but more than anything, the opportunity to spend time with an entire organization, even for just a few hours or days, is mission critical to our ability to make decisions on who to invest with or not. After all, this is one of the best opportunities to assess (and re-assess) the most critical asset in our decision-making framework, the people.
By and large, that is the task of private equity allocators. Blind pool investing is about investing in people. As private equity investors, we rarely get to invest in a pre-specified or known pool of assets. We make ‘commitments’ to a group of investment professionals who will then identify, seek out, negotiate, acquire (or invest in), operate, improve and (hopefully) sell (for a profit). This doesn’t happen overnight; in fact, it is the case that these portfolios materialize over time periods better measured by fractional decades than weeks or months. Of course, we spend considerable time understanding strategy, philosophy, tangible skill set, historical performance, etc., but what we are really doing boils down to one word: trust.
Simply put, we need to trust the people who are completing the tasks above. After all, we entrust capital from our families or organizations (pension funds, insurance companies, endowments, foundations, etc.) to an investment firm that we believe will execute a winning strategy. There are no assurances, and we won’t know if this trust was warranted until many years later. Sounds daunting for sure, but wait, there’s more.
The other nuance to this asset class is that these positions are illiquid. You’re not officially stuck with the investment once you make that initial commitment (there is a much more developed and robust secondary market in the private equity world today). However, it’s still not as simple as pressing ‘Sell’ on your online brokerage platform. Even if we have a superior skill at analyzing individual positions, most allocators aren’t making that decision. (Some invest directly, but that brings a host of other considerations). In truth, the core of the asset class is that you aren’t looking to ‘trade’; you are looking to build relationships for the long-term, with the long-term nature of the asset class itself but also the friction costs embedded in manager turnover. We are hopeful that the folks we entrusted with capital are the ones that will generate the performance we hoped when we initially invested and do so in a manner that is consistent with our expectations. That doesn’t always happen, so we may decide to sell out of a position in a rare instance, but ultimately, we express our displeasure by no longer supporting that group in the future.
This is why these annual meetings, which were sometimes viewed as frivolous boondoggles (and there were undoubtedly many that fit that bill over the years), are critical to building the mosaic of decision-making for ongoing investment. This is mostly the ‘soft stuff’ — talking with the mid-level professionals to see how they feel about their peers, deals, and prospects. This is about gauging the energy of the room — are the professionals excited when they talk about their companies? Are the CEOs reading from a script, or do they seem to be telling the story as they live it daily? How do people interact — who talks with investors, who sits with who at dinner, is there enough time for questions, are there breaks to let the investors chat amongst themselves? In our world of ultra-connectivity, we may have previously written off these human assessments. They still provide vital insight beyond what is written in regular correspondence we receive as investors. And in today’s world, we are getting a real-live tutorial on what to do when we don’t have the benefit of spending time together in person.
Can we get as much out of annual meetings if the rooms are empty?
Reflecting on this, I might provide some advice.
For LPs — don’t dread the long travel days. Try not to be distracted by other things (there will always be an e-mail to attend to and a proverbial fire to put out), and pay attention to everything happening around you. We get precious few of these opportunities, so use the time wisely, go in with goals and an idea of what you want to learn, and a clear path of how you will discover them.
For GPs — be aware that we’re watching. I say this not as a warning or a threat, but that your authenticity will be difficult to mask for even a half day. While we know this is a production to some degree, make sure you remind us why we should still trust you beyond just returns.
Ultimately, blind pool fund investing relies on the allocator’s ability to assess the people doing the investing. As allocators, we need to continue to focus on that point, taking advantage of every opportunity to determine best if those people are going to be the ones worthy of our trust and capital.
