A short guide to investor engagement: Three key steps for managers as they navigate communications in distressed markets

It is a complicated time for investment managers. Although the long-term outlook appears strong – with the real economy in an apparent “soft-landing” scenario – persistent inflation and the resulting risk of “higher for longer” interest rate policy may present a rocky path for managers to navigate. Companies are facing the tightest loan markets in recent history, and corporate bankruptcies are back on the table.

As managers adjust their strategy in this novel and challenging environment, they may need to remember to manage their investor relationships as well. Below, we outline key steps for managers to consider.

Conduct proactive outreach

When a particular problem emerges, consider reaching out to your investors, communicating the problem to them, and outlining your strategy to tackle it. Do not limit investor communications to only the updates required under the applicable investment agreements. Your investors are just as vested in the performance of your assets – they need to understand the emerging risks that the portfolio may be facing and how strategy will adjust to address those risks.

Although it can be difficult to communicate bad news, being proactive may help foster confidence that you are tackling the situation to the best of your ability. Your investors understand the general state of the market and the portfolio – failure to update them about obvious distress can leave investors worried and cautious about the larger state of the fund. Proactive outreach may help prevent problems from developing further down the road.

Think of investors as a resource

Consider reaching out to your investors for help when necessary. Apprehension about engaging with investors is understandable, particularly given the challenging fundraising and liquidity environment, but it does not need to be seen as a problem to mitigate. Investors can be valuable independent sources of information and support for managers because they understand the challenges created by the current market environment. They also have their own networks and resources that can help manage distressed situations. In fact, many investors would rather be a constructive part of the solution, including through effectuating LP-led restructurings. Further, engaging with investors during challenging times can help build durable, long-term relationships with them.

Develop an effective communication strategy

Effective communication starts with understanding your investors – who they are, what they need to know, and how they will respond. There is no “one size fits all” approach, but there are three general principles to consider following.

First, convey that you have a solid understanding of the problem and have been working to develop thoughtful solutions.

Second, let your investors know how much runway is left and of any other relevant deadlines along the way.

Third, present an action plan that contains clear – and realistic – funding needs and restructuring options. With respect to the latter, also evaluate how to ensure that economic interests remain aligned. When investments fall into distressed territory, it may be important to consider the need for alternative fee structures.

For more information

Our team has substantial experience representing both investors and managers through difficult situations such as these. We are positioned to advise on best practices when handling these communications. If you have any questions, please contact the authors or your usual DLA Piper contact.