Unfortunately, not all investments are successful, and while it may not be possible to salvage an investment in a portfolio company with an underlying structural problem, it may be possible to turn around a poor performance record or preserve the value of an investment by
- Meeting with the portfolio company's management to discuss performance and agree on strategies and tactics through which a turnaround can be achieved;
- Increasing the frequency and depth of monitoring of the investment and meeting with management;
- Agreeing with management regarding needs and nature of remedial action required. This could include introducing expert consultancies to help solve problems, develop new approaches and identify new opportunities;
- Supporting the business with external resources;
- Making changes to the portfolio company's management team, perhaps introducing a senior level "trouble shooter";
- Agreeing to reschedule payments (e.g., loans or fixed payment obligations) or renegotiating bank covenants to give the portfolio company "breathing room" with its bank(s).
GPs should be aware that bankruptcy laws, while varying from country to country, may impose personal liability (including criminal liability in certain circumstances) on the directors of a portfolio company (including de facto and "shadow" directors) if they allow the portfolio company to continue trading in certain circumstances.
As soon as information received as part of the monitoring process shows that an investment is not performing well, GP should seek prompt action and meet with the portfolio company's management and, if necessary, in case of financial underperformance, with other funders such as banks and co-investors to agree plans for remedial action and any additional information requirements.
When managing an underperforming investment, GP should ensure that appropriate local legal advice has been obtained and that the portfolio company complies with all applicable legal and regulatory requirements, including where these relate to ESG factors. Directors who are not familiar with the specific legal requirements in reorganisation, restructuring or insolvency situations (or the specific jurisdiction in which the portfolio company is located) should seek timely legal advice.
If the GP has appointed one or more directors to the board, consideration should be given, where permitted in the relevant jurisdiction, to appointing another executive to exercise the fund's rights as a shareholder in order to reduce conflicts of interest. It is important to keep communications with LPs open and clear to manage expectations regarding the investment.
GPs and portfolio companies should consider the need for timely information and communication with other stakeholders when an investment is in trouble. The timing of communications with employees can be particularly complex, and the role that employee representatives might play should be carefully considered.
When managing underperforming investments, the GP should ensure that sufficient resources remain committed to monitoring and managing other investments.