Necessary reports should made available to investors in a timely fashion. For quarterly and annual reports, be ready with quarterly financial statements, regular portfolio reviews, and valuation reports.
The annual report, perhaps the most important, comprises:
- Annual audited financial statements;
- Valuation report, confirmed by auditors;
- Annual environmental and social report;
- Summary portfolio update letter;
- Assessment and overview of impact performace;
- Management discussion of key drivers of activity and performance;
- Summary of capital activity (cash flows);
- Transactions closed or pending, including portfolio company defaults, breaches of the limited partnership agreement, etc.;
- Consistent with ILPA Principles V 2.0, discussion of any material changes in risk factors;
- Ad hoc reporting of any issues and events that occur; and
- Announcement of investor meetings (LPAC and annual investor meeting).
In addition to formal and regular reporting to investors, establish strong relationships through regular informal communication, to keep investors close, preserve their likely involvement in future funds, and empower LPs to be ambassadors to other potential investors. Regular formal and informal communication with investors on a quarterly basis is best, but such communication can take different forms depending on the LP, including scheduled field visits to investees or informal quarterly meetings.
The relationship between the management of the investee companies and the fund manager is essential, since funds are not passive investors and can ensure effective governance through ongoing, informal interactions. More formal governance of the investee companies can include representation on the board, leading a board sub-committee, and creating appropriate covenants.
Governance: Role on Company Boards
One way to monitor portfolio companies is to appoint a representative from the fund to the company’s board. In this role, a fund manager would have the ability to:
- Request an evaluation of company governance to achieve best practice;
- Review or establish a code of ethics, veto and other rights;
- Define charter, role, and decision-making;
- Ensure Board’s role is clearly defined;
- Formalize the Board’s role in the Company’s corporate governance or board charter;
- Ensure directors understand duties and responsibilities to company and shareholders;
- Separate the roles of chairman and CEO.
In addition, a board member can suggest the establishment of other important board committees in order to provide independent oversight of the company on key issues that are reported to the board on a regular basis. These committees may focus on ethics, company audits, remuneration, corporate governance, or hiring.