LP Corner April issue 2006

The job of investor relations professional in private equity terms is relatively new, although the role itself has been there from the start. The rise of the investor relations professional is partly driven by the changed and changing nature of today’s private equity fundraising market and the private equity investor community but also by the more general fact that the private equity asset class is maturing. Mostly the evolution is seen as positive on the part of limited partner investors. Lisa Bushrod reports.

Investor relations has always been part and parcel of running a private equity firm because, like any business, you can’t only focus on the product (i.e. ultimately the returns made for investors) but must give the customer (i.e. the limited partner investor) equal attention. Sadly, the two strands haven’t always been given equal treatment in the private equity arena, and limited partners have consequently been made to feel by some private equity firms as though the firm has taken their money and run. For their part the private equity firms guilty of making their LPs feel this way no doubt believe that as long as the product does what it says on the tin, i.e. delivers the promising returns, then the LP has little to gripe about. And for a long time private equity firms got away with this approach, largely because once they have secured funds, an LP is pretty much stuck with them, given that the typical private equity fund has a ten-year life, effectively locking the LP into the relationship for that length of time.

What’s changed is probably nothing more than the maturing of the private equity

asset class. The European private equity market has been around in a meaningful way

in terms of tracking performance for around 10 years now (the European market and trackable fund performance has obviously been around for getting on 15 years but given the fact that there were in some cases not much more than a handful of firms in each European country, performance over and above 10 to 15 years ago is arguably less meaningful as it can be distorted relatively easily). So with 10 to 15 years of hard data to refer to as a backdrop LPs can make now informed decisions about where returns are likely to emanate from in the future in terms of firms, their strategies and so forth. But having now been around the fund raising block a few times, LPs have realised they consistently find the due diligence process incredibly time consuming.

This has not gone unnoticed by private equity firms. Patrick Petit of placement agent Global Private Equity says: “GPs are probably more aware than before that it has to be a long term relationship [with an LP], especially since there is a tendency among LPs to decrease their relationships with funds. They prefer to commit more money to less funds.” So, presuming all private equity firms view themselves as fund managers and will therefore go on to raise subsequent funds, leaving an LP with the sense that they have been given the take-their-money-and-run approach is at best bad for business, especially given that one of the principal markers in a fundraising for LPs is whether or not existing LPs have recommitted to a fund and if not, why not.

Mounir Guen of placement agent MVision, more kindly, puts the different approaches down to natural cultural differences between private equity firms and their LP investors. He says: “GPs work on deals, and for them they approach fundraising with more of a deal mentality than an investor who have processes in managing their portfolio.”

The emphasis on an investment programme for LPs, driven by the time consuming nature of doing due diligence on new groups and the need to have a manageable number of investments with private equity firms, coupled with the huge rise in standardised reporting requirements of LPs both to their internal master and their investors in turn (since many have their own LPs to keep informed), have irrevocably changed the LP/private equity firm relationship dynamics. “The investor community is demanding high quality relationships with its GPs and you ignore that at your peril,” says Julian Knott, investor relations partner at Electra Europe Partners.

So while investor relations has always been a part of running a private equity firm, it’s widely acknowledged that the approach and emphasis to this role is changing within private equity firms, albeit for the most part in response to external pressure. On one level the role of investor relations has taken on

new meaning because it is simply a full time job these days, thanks to the detailed quarterly reporting and annual investor meeting plus ad hoc communication programme that are required as a bare minimum to keep LPs happy.

How firms approach this depends, either the finance (CFO or management accountant) in conjunction with the in-house administrative function within the private equity firm handles this alongside a deal partner who takes the lead in all face to face or telephone contact with LPs, or an investor relations professional is employed. The latter is typically someone who can straddle both the finance/admin and deal partner functions up to the point where involvement from the firm’s deal professionals becomes a necessity for LP comfort. Neither approach is particularly affected by the level of outsourcing in any given firm, be that the fund administration and/or to a placement agent at the time of fundraising, but anecdotal evidence suggests that either the increasing demands on deal professionals time or a particular event within a firm, such as a new fundraising, have caused the investor relations role to be pushed either into the hands of a dedicated investor relations professional or towards greater involvement from finance and administrative functions.

Helen Steers at fund-of-funds investor Pantheon says: “There are two distinct roles: the ongoing role in-between fundraising, and the role during fundraising. People have realised LPs are not just interested in a three-year update each time a firm is looking for further commitments. As the climate has changed people are more in a sort of continuous fundraising mode. In between funds they are being a lot more proactive with LPs, [maintaining] a continuous dialogue.” Guen outlines some of what LPs require: “What the investor wants in-between the fund raising includes updates on new investments, reporting, monitoring, visibility such as people changing within the organization and problems in portfolio. Each investor has a different combination of information they need.”

Given that this involves a lot of ongoing work by the private equity firm to compile and distribute the relevant information to investors, they typically expect their existing investors to be almost entering a tick box scenario when presented with the PPM (private placement memorandum) for a follow-on fund being raised on a same-as-last-time strategy, deal size etc basis. “When a fund raising begins the investors begin a process that feels as if they are starting from scratch. After three or four years contact in between fund raisings GPs find that confusing: they expect investors to be completely up to speed,” says Guen.

For their part, given that a private equity firm typically raises a new fund every three to four years, LP investors need to make sure they are comfortable not just with the firm’s track record but the deal professionals, some of whom may be new and others who will have risen the ranks during the previous three to four years and others who may have lost interest/ gained new interests during that period. It shouldn’t come as a surprise to private equity firms given the emphasis placed on key man clauses by LPs in private equity fund management agreements.

But given the different approaches of

firms in terms of who actually does the

job of investor relations, is it one that is easily defined? Knott does so simply: “Communication, communication, communication.” But he goes on to make a point every investor relations professional seems keen to underscore: “The most difficult part of the role is it has to be about listening as well as talking; you are not just a broadcaster.” Another investor relations says: “Our role changes according to investor climate and what’s happening in the fund. We have to communicate what the plan is and make sure

the plan is workable from an LP standpoint. Even groups without IR people have a senior partner whose job is to listen to what LPs are saying.”

Craig Donaldson, who leads the investor relations function at HgCapital, defines what the customer (LP investor) focused side of a private equity business should be trying to achieve: “As a rough guide, there are five disciplines an investor relations function should seek to master: first, and above all, you must provide a credible service to your existing clients; second, you need to be able to develop relationships with investors that may be convertible to limited partners in your firm’s subsequent funds, this is best done over a period of months and years; third, you need to be a credible voice in the market for your firm; fourth, you have got to be a strong and credible voice for your clients (and the market) within your firm; and fifth, you should do these things in a way that is value-adding and time leveraging for your firm.”

Having such a clear view of what a firm should be trying to achieve in terms of its customer relationships is doubtless incredibly useful and Donaldson can point to just 10 days travelling to see LPs for deal professionals on HgCapital’s recent €950m fundraising as proof of the success of this strategy for the firm. However, as clear as a firm can be on what it is trying to achieve through its investor relations strategy, the fundraising is the time when there is most likely to be a disconnect between what the private equity firm is offering and what investors feel they need. And many investor relations professionals are all too aware of this. “[LPs] want a good IR person who can answer any questions they have and they also want access to senior partners, so you can suddenly go from being helpful to being a blocker,” says one. Being a blocker is at times a key part of the investor relations role, one that both the deal professional and the investors want performed so that deal professionals spend the bulk of their time making, managing and exiting the investments for the fund (or as Donaldson put it, time leveraging for the private equity firm). From the other side of the fence, Steers notes: “As an investor you don’t want the investment professionals spending all their time answering questions, but in the end, it is impossible for an investor to make a fully informed decision without talking directly with the investment team.”

As the role of investor relations continues to creep up the list of private equity firms’ priorities, it’s interesting to note the difference in calibre of staff handling the role, from top tier MBA schools and strategy consulting firms on the one hand, to secretaries and administrators that have seen investor relations type functions increasingly take up their time. When asked whether the former will predominate in five years time, one investor relations professional who firmly falls into the former camp is quick to point out that calibre of CV won’t eradicate the fact that some will always perform the role better than others so those for whom the role has come about by way of an evolution may well be among the best performers in the eyes of the LPs. Although those for whom the role has evolved may need to overcome CV snobbery issues within these firms, if Donaldson’s point about the credibility to communicate LPs concerns within an organisation is not to be their undoing. Professionalisation of the investor relations role appears increasingly likely, however, with Steers commenting she could see that in five years time the role will be akin in stature and necessity to that of a CFO within a private equity firm.