The COVID-19 Black Swan is presenting challenges that could lead to costly mistakes. After countless conversations and articles reviewed, several takeaways emerged and corresponding recommendations for Private Market managers to best prepare each from making costly mistakes during and post this pandemic. “Invest in the face of adversity” was best said in a recent article from Boston Consulting Group (BCG) on “Shaping the Post-COVID Era”.
Key Takeaways from the Past Few Weeks:
1) THIS WILL BE LONGER THAN YOU THINK.
This crisis is expected to be longer than most have been planning on. Many experts expect vaccines for broad public consumption in 9 to 12 months, which means we should be prepared for this current environment to last much longer than the month(s) or quarter than originally thought.
2) THE NEW NORM.
Now that the immediate firefights have become the new norm, Private Market managers should expect repeated questions from clients and board meetings surrounding:
- How will this Black Swan event affect investments?
- What investments are worth and how valuations may change?
- What proactive steps can be taken during and following this crisis to protect investments?
3) PRESSURE WILL INCREASE.
Expect mounting pressure from all sides:
- Staffing and client communications will accelerate reliance on digital technologies.
- Stresses on cash will only increase as revenue risks escalate; putting more stress on performance and fees.
- Previous monthly and quarterly investor reporting requirements have quickly turned into daily and weekly drills.
Now that we’re seeing this pandemic for what it is – a true force majeure event – we should use this as an opportunity to get stronger and more resilient for challenges that lie ahead irrespective of whether this recovery has a “V”, “U” or “L” shape.
3 Challenges to Address:
1) STOP FOCUSING ON “MORE DATA” AND GET FOCUSED ON THE RIGHT DATA…FROM THE ASSET UP
Too many managers rush to get access to “more data” building data warehousing and intelligence solutions without a focus on clear outcomes. Most have already solved for the easy stuff – getting portfolio or operator fund/portfolio data. However, for most managers, this isn’t enough to truly stress test. Managers should instead look to ingest and examine asset-level data across financial, risk and ESG factors to provide investors the level of transparency and scenarios to maintain their confidence in your risk mitigation plans.
2) AVOID THE TRAP – NO PORTFOLIO TEAM IS BIG ENOUGH TO COMPETE AGAINST TECHNOLOGY DRIVEN SCENARIOS:
During these uncertain times, managers must look to enable technology to:
- Drive daily/weekly valuation scenarios looking at downside and disruption risk to investor returns.
- Run investment models against operational models to truly provide investors with the level of transparency they’re expecting.
- Equally run analysis against carry and management fees.
In a recent article, Responding to the business impacts of coronavirus, PWC recommends, updating scenario plans and agree on actions to cover a minimum of 3-6 months of impact and up to 12-18 months of impact. They also recommend these plans are updated weekly along with reviewing items such as insurance coverage, the creditworthiness of providers, key-man risk, systems capabilities for the off-site workforce, and cyber readiness.
3) DIFFERENTIATE THROUGH TRANSPARENCY:
The managers who are “proactive in their transparency without surprises” during this crisis and post will set a new standard that is already fast becoming a requirement. Instead of letting investors find key risks in disclosures differentiate through your transparency. We’ve seen some managers proactively connecting with their investor clients about the scenarios they’re running and views on downside risks through this phase versus reacting to each investor’s inquiry.
Aligned with BCG, our view is that this Black Swan event is “not a reason to postpone innovation and investment.” By taking action on the above core challenges, turning each into opportunities has great potential to create differentiated competitive advantage now and long after COVID-19 is a distant memory.
If you’re interested in discussing your data strategy, let’s connect, I am happy to chat about the opportunity at hand.
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