Investment monitoring, reporting and value creation

As you move to the investment holding stage, you will start receiving data from your portfolio companies for the KPIs agreed at the investment stage. This is a key part of the process as it is when you will see the practical implementation of the agreed ESG policy, as well as the value added you have brought to your portfolio companies.

However, you may face a few challenges during the data collection process:

The first key challenge is the inability to collect information from certain portfolio companies. This could be due to multiple factors including a lack of ESG resources at the company level; low investment holding to be able to convince the portfolio companies to provide the information; and cost considerations that make it too onerous to gather certain data. You should discuss all these matters early on with your portfolio companies and ensure that adequate solutions are reached. Possible answers could include:

• drafting a set of KPIs for which the data is readily available;

• determining what information is being asked for by other investors and designing your firm’s KPIs using that information;

• using proxies to estimate data;

• determining a materiality level and only collecting information from those companies that are material.

An important issue in this respect is critical incident reporting. Appropriate escalation levels need to be in place to ensure that relevant (ESG) incidents within portfolio companies are reported in a timely manner to the board and then to investors. Oftentimes, GPs do not receive information about critical incidents due to discretion within portfolio company executive management not to report such items. Escalation levels and expectations should be set out early with portfolio companies. Firms should work closely with the portfolio companies to ensure they undertake root cause analysis along with creating and implementing corrective actions. Firms should also consider the materiality of the event/incident as part of any reporting obligations to investors (ideally, the cascade of materiality should not be set at too high a level).

The second challenge your firm is likely to face is the ability of some portfolio companies to produce and provide data in a timely manner. The underlying portfolio companies, depending on their size, may have to generate and gather information from multiple data points within their departments. This would mean hundreds of data points at the firm level from multiple portfolio companies. If the process is not managed early on, then it could mean information being delayed for investor reporting. Thus, a robust process is required and needs the right level of resources to run it.

The third challenge is how to standardise, clean and sense check data when it comes in from your portfolio companies. Due to the number of data points involved, it is very possible that different portfolio companies do not send information which conform to the central methodology used by your firm. To avoid this situation, you should provide adequate information in the form of written guidance and training to the parties in your portfolio companies who will be responsible for data collation/provision. Also, you should establish checks and balances, so that any outliers are identified and, if needed, corrected in time.

Once you have gathered data from your portfolio companies and you have sense checked it, you should compare it to the long-term target of the portfolio companies and portfolio as a whole. Often this all requires non-financial targets are set to be able to determine what is on track/behind/ahead. Consideration of relevant non-financial metrics to be used as targets requires skill and often input from specialists but can be very powerful.

The information then needs to be analysed and interpreted and your firm needs to determine whether any short and/or long-term corrective measures are necessary to achieve the intended results. You should then provide this feedback to your portfolio companies.

Often your portfolio companies may lack the right resources to be able to understand and implement the feedback provided. This could be a major challenge if your firm plans to be a frontrunner in the ESG space. Lack of ESG progress in certain parts of your portfolio could adversely impact the reputation of your firm and the value of other portfolio companies as well. Thus, you should plan for this event from early on, determine the resource requirement and ensure that the feedback provided is taken on board and implemented by your portfolio companies.

Based on the analysis of data, you should then communicate the information to the investors and different stakeholders, taking into consideration what level of reporting was promised to them at the fundraising stage and based on the regulatory requirements that your firm operates in. Communication and reporting is a key piece of the relationship between GPs and LPs and can take the form of quarterly reports, AGMs, reporting metrics, any legal reporting, as well as ad-hoc communications where necessary.

Feedback from investors and other stakeholders could help your firm determine its corrective measures. This results in satisfied investors and stakeholders and firstly helps in the next fundraise, but secondly also contributes to building a reputation for your firm that helps expand the market for your portfolio companies and find the right buyers for an exit. This is a gradual process that helps reap the right rewards over time.