business continuity planning is a necessity for your fund and portfolio

The Importance of Preparedness in a Volatile World

Approximately eleven months ago, a communication was distributed via email to our network of global fund managers and the chief executive officers of our directly held portfolio companies, bearing the title “Only the decisive survive.” At the time, widespread concern regarding COVID-19 was largely absent outside of China.

However, I maintained a focused attention on the situation. Information received from fund manager colleagues operating within China indicated a severity of circumstances exceeding the narrative presented by Chinese media outlets.

Proximity and Early Warnings

Furthermore, my personal proximity – residing just five miles south of the location of the first recorded COVID-19 fatality in the United States – heightened my awareness. The pandemic’s progression was demonstrably exponential.

The intention behind the initial communication was to encourage all partners to recognize the inherent risks and proactively implement preparatory measures to the fullest extent possible.

Current Concerns and Proactive Measures

While the current situation does not necessitate the same degree of immediate action or urgency, a degree of concern remains warranted. Precautionary steps should be undertaken, not solely in response to COVID-19, but to fortify the resilience of our firms against unforeseen adversity.

My colleague, Susana, with two decades of experience investing in 90 funds, has observed numerous instances of fund managers and CEOs being impacted by unexpected events – ranging from accidents to struggles with depression.

The Inevitability of Disruption

Life often presents such challenges, and the possibility of personal disruption – the “What happens if I get hit by a bus?” scenario – is a reality. In the present context, that metaphorical “bus” takes the form of a global pandemic.

Recently, one of our Asian-based funds reported confirmed COVID-19 cases among the CEOs of three of its 23 portfolio companies.

Global Infection Trends

Although infection and mortality rates are declining in many developed markets, significant outbreaks are occurring in numerous countries, with Brazil currently facing a particularly challenging situation.

The Institute for Health Metrics and Evaluation (IHME) forecasts an increase in COVID-19 cases across sub-Saharan Africa and the East Asia and Pacific regions.

The Latin America and Caribbean (LAC) region is generally experiencing a downward trend, but certain nations, including Colombia, are anticipated to encounter subsequent waves of infection.

A Continuing Threat

As The Economist noted in mid-February, “Coronavirus is not done with humanity yet.” Preparedness and resilience remain crucial for navigating the ongoing uncertainties.

Contingency Planning for Investment Funds

Recently, we encountered a situation with a potential investment in an African fund we had been vetting for several months. Communication abruptly ceased for over a fortnight. Uncertainty prevailed regarding the reason for their silence.

Upon re-establishing contact, we discovered the fund’s managing partner had suffered a severe bout of food poisoning, requiring two weeks of hospitalization. The team, unsure how to handle inquiries directed to her, opted for complete radio silence. Currently, their investment director is dealing with a COVID-19 infection. While unfortunate, this serves as a valuable lesson for all.

Consider this scenario: “What repercussions would arise if you or your business partner(s) were unexpectedly hospitalized, without access to communication, for a period of two to three weeks, or even longer?”

If you lack a clear answer, it indicates the absence of a robust business continuity plan. This plan doesn’t require excessive complexity or length, but it must outline procedures for maintaining critical operations. It should detail task delegation, decision-making authority, and protocols for situations requiring your direct involvement.

Focus on the most significant aspects. For example, the plan should cover processes for issuing capital calls, responding to key investors, and ensuring timely payroll processing. Identify your essential daily responsibilities and document them.

Subsequently, discuss the plan with your partners and ensure that one or two trusted senior team members are also thoroughly familiar with its contents.

Implementing such a plan will provide peace of mind for you, your partners, and your investors.

Key Elements of a Continuity Plan

• Capital Call Procedures: Who is authorized to initiate and approve capital calls in your absence?
• Investor Relations: How will inquiries from anchor investors be handled?
• Financial Operations: What is the process for ensuring payroll and other critical payments are made on time?
• Communication Protocol: Who is responsible for communicating updates to investors and stakeholders?

A well-defined plan mitigates risk and ensures operational stability during unforeseen circumstances.

Business Continuity Planning for Key Personnel

Just as businesses require robust continuity plans, it’s crucial to acknowledge that entrepreneurs and key leaders are also susceptible to unforeseen circumstances, including illness or incapacitation. A disruption to their availability, whether for a short period or permanently, can significantly impact operations.

Therefore, the principles of business continuity planning should be extended to encompass your firm’s CEOs and their executive teams. Proactive preparation is essential for maintaining stability.

Initiate a conversation during your next meeting. A simple inquiry such as, “We’ve recently developed a business continuity plan to ensure operational resilience in the event of a key team member’s absence – due to illness, disability, or other unforeseen events. This plan safeguards employee compensation, maintains client engagement, and supports continued productivity.”

Follow this with, “I was wondering if you have a similar plan in place for your team? If so, would you be willing to share a copy?”

If they haven’t established a plan, consider suggesting the following strategies:

• Buddy System: Designate a colleague for each key individual who can reliably assume their responsibilities during an absence.
• Documented Coverage Plans: Create detailed documentation outlining who is capable of covering specific duties when someone is on leave or unwell. This documentation should be readily accessible and consistently updated.
• DFNO – Design for No Operations: Prioritize automation wherever feasible. For tasks that cannot be automated, implement well-documented, standardized processes.
• Remote Work Capabilities: Leverage the established infrastructure for remote work. Identify and address any potential challenges that may arise if a key person is working remotely and becomes unreachable.
• Regular Testing: Periodically test the business continuity plan to maintain preparedness and identify areas for improvement.
• Multiple Signatories: For smaller to medium-sized firms, having multiple responsible partners authorized as signatories is beneficial. A requirement of two signatures for significant financial transactions provides a safeguard against disruption.

Having three signatories for substantial decisions or large financial transfers is a prudent practice. This ensures that even if one individual is unavailable, critical operations can continue uninterrupted.

Plan Validation Through Practical Exercise

A collaborative firm operating within Latin America recently demonstrated the effectiveness of their business continuity plan through a real-world test. This involved one of the three managing partners deliberately disconnecting for a full week.

While contact with the partner was possible, a conscious decision was made by colleagues to respect their time away and proceed with essential operations. This included successfully completing a significant transaction and finalizing a Limited Partnership (LP) report.

Key Elements for Successful Implementation

The successful execution of this test hinged on two crucial factors. Firstly, robust and clearly defined internal approval procedures were already in place.

Secondly, the firm had proactively secured the necessary powers of attorney. This ensured that the remaining two partners possessed the authority to approve financial transactions, specifically wire transfers.

As a result, the organization now possesses the confirmed ability to maintain operational momentum even in the absence of one of its key leaders.

This exercise validated their preparedness and highlighted the importance of proactive planning for unforeseen circumstances.