Investors are expressing their concerns about the future of private equity firms due to the recent economic downturn. On the other hand, many private equity firms have already increased transparency to reestablish investor trust and grow their businesses. Transparency is a major concern for investors in the private equity industry. They frequently invest in companies that do not regularly share information. Private equity firms can increase transparency with their investors in various ways. Below are some ways to do that.
Private equity firms should be transparent about their fees and expenses. It includes how much they charge for management, consulting, and other services. It’s also critical to understand what’s included in these fees (e.g., legal fees, accounting costs) and what isn’t (e.g., investment advice).
Sharing this type of information fosters investor trust by making it easier to track how their money the company spends. It also assists them in determining when they can expect a return on their investment.
One way private equity firms can increase the transparency of data and other information is by utilizing a private equity platform. Having a platform with up-to-date technological tools such as a sharing portal or video conferencing during investor meetings will ensure that all investors have simultaneous access to the same information.
This enables investors to make more informed investment decisions and hold private equity firms accountable for spending money.
Transparency in Business Structure
For example, suppose they are part of a larger network that provides consulting or legal advice services. In that case, they should disclose this information to the investors. It will help the investors understand what services the companies are providing and how much it costs them.
Some organizations will also establish subsidiaries within their network to provide specialized products and services under the same brand name. Private equity managers must state whether they offer investors investments in their own company or sell the shares in other companies within the larger group.
This knowledge will enable investors to make more informed decisions about investing. It will make it easier for private equity firms to attract the right type of investors.
Openness about Company Performance
If you own stock in a publicly-traded company, you know that official reports reveal how much profit the company made in the previous year. Companies have no choice but to provide this information to their shareholders every three months. It is because the law mandates it.
While many private equity firms are not publicly traded, they should be just as forthcoming about their financial results to improve transparency. All private equity firms should publish quarterly reports that show how much profit they’ve made thus far. They should also reveal which deals are currently active and what their pipeline looks like. This will help the investors to determine if their money is being put to good use.
Set Goals for Each Investment Stage
Private equity managers should set specific goals for each stage of an investment to increase transparency. For example, they may want to achieve a specific rate of return within a specific time frame or have specific milestones that they must meet for the investment to be considered a success.
By establishing clear objectives, private equity firms can better communicate their expectations to their investors and reduce the likelihood of misunderstandings. Investors will know exactly what they’re investing in, and they’ll be able to track the progress of each investment. Thus, allowing them to make informed decisions about whether to continue putting money into that specific fund.
Make it Clear Who is Making Investment Decisions
The fact that both parties can claim partial responsibility for investments is one of the factors contributing to investor distrust in private equity. Managers, for example, will always claim that they were the ones who made recommendations and recommended specific deals to investors. In contrast, investors may eventually point out that they are ultimately responsible for their choices.
There’s nothing wrong with taking credit when you deserve it, but there should be no doubt about who makes the final decision on an investment. As a result, private equity firms must clarify who makes the investment decision and veto power over all major decisions. This includes adding new partners or changing investment strategies.
While private equity firms cannot guarantee that all investments will be successful, being open about their performance will help investors build trust. Investors will feel more at ease investing in a private equity firm if they know it is open and honest about its successes and failures.
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Article Written by: Sierra Powell