Speaking at Private Equity International's recent Investor Relations forum in London, a keynote speaker recalled with apparent affection the not-so-distant days of the ‘kitchen table’ annual meeting between a GP and its fund investors. The concept is self-explanatory: when funds rarely had more than a handful of backers, everyone could be accommodated round a small table and discuss all issues pertaining to the fund face-to-face, preferably over coffee and biscuits.
Such a scenario might have been played out for example when Schroder Ventures, back in the old days, invited limited partners to discuss the performance of its debut 1985-vintage buyout fund, a £75 million (€109 million; $136 million) vehicle. If so, it's hard to imagine that such intimacy has continued to exist since the renaming of the firm as Permira in 2001 and the subsequent collation of around €20 billion from four fundraising efforts (including the recent first closing of its latest fund for a near-€11 billion). Far from the kitchen table, the largest buyout funds today might be hard pressed to accommodate all their supporters in an average-size conference venue.
The increased scale of private equity is beyond question, a reality that becomes evident when considering that some of the largest funds now boast 200 or more LPs. This could easily lead to the assumption that investor relations (IR) must be on the private equity agenda as never before, as the demand for information from burgeoning investor bases grows substantially. It may also be deduced that this is seen from the LP side of the fence as unalloyed good news: after all, if it's true that IR is now given greater priority than before, then surely investor demands will be catered for more comprehensively than at any time in the past?
Dig a little deeper and things do not appear quite so straightforward. Some say, for example, that IR is not as central to the GP agenda as many might imagine. Contends Peter Flynn, a director of London-based placement agent Candela Capital: “Investor relations in private equity does not have as high a priority as in the wider asset management industry. For the reason behind that, you have to look at where these organisations have come from. Until recently, many were very small and lean firms where the managing partners only viewed the investment side of the business as important.”
LACK OF SENIORITY
At times, this marginalisation of IR is also reflected in the lack of seniority granted to IR staff, who will often not be part of the senior management team. Some may not even be entitled to carried interest. One anonymous LP says fund managers might be guilty of hypocrisy in this respect: “If a private equity firm had a portfolio company where the head of sales and marketing did not have a main board seat, questions would be asked.”
Such comments are not hard to obtain: not everyone believes that the IR effort in larger GP groups has necessarily kept pace with the industry's greater scale. And even if it had, to come back to a point made earlier: would this necessarily be of benefit to LPs? To state the obvious, private equity firms start off small. Unless the GP takes its eye off the ball completely, IR will be easy at that point – even when there is no dedicated resource – on the basis that there are so few investors to keep happy. Every time an LP has an issue to address, it can simply call up a member of the senior management team for a cosy personal chat.
When firms grow and bring on board more investors, the demand for information may simply become too great for the management team to handle and, at that point, an IR resource may be drafted in or nurtured in-house. It's a necessity LPs generally recognise, but not perhaps something they always relish. Vicky Mudford, founder and director of eponymous private equity-focused services provider Vicky Mudford Limited, explains: “As the number of LPs in funds grow, they can become further and further removed from the senior management team because they end up interfacing primarily with the IR team. That can be a source of frustration because, after all, it's the management team that they're backing, not the IR team. But if a fund has 200 LPs, how do you manage all those relationships effectively?”
As the number of LPs in funds grow, they can become further and further removed from the senior management team because they end up interfacing primarily with the IR team
The answer to that question depends to a certain extent on what type of investor you are. Martin Vervoort, head of European fund investments at Netherlands-based LP heavyweight AlpInvest Partners, says his organisation has little trouble accessing senior management. There again, with over €30 billion in assets under management and a reputation as an investor that brings with it valuable strategic guidance, perhaps that's hardly surprising. “We're very fortunate because of our size,” acknowledges Vervoort. “But if you're a small investor, it's unlikely you'll get as much attention from the senior professionals.”
HOW CLOSE, HOW KNOWLEDGEABLE?
If, as an investor, you do find yourself only able to communicate with IR professionals, you will probably be reliant for quality of information on two things: firstly, how close the relationship is between the IR team and the senior management team; and, second, how knowledgeable the IR professionals are about their own firm's fund.
On the first point, if the IR team does not have enough influence within the organisation to be in regular contact with the senior management and/or investment team, LPs will likely not get the quality and depth of information they are looking for. Vervoort maintains that there is “room for improvement” in communicating developments within the GP that are “relevant to the alignment of interest”. Specifically, he estimates that less than half of the GPs that AlpInvest comes into contact with systematically provide updates in areas such as hirings and firings, promotions and profit sharing.
On the second point, IR professionals will quickly lose face with investors if they do not have an acute understanding of their own firm's strategy (being an observer on the investment committee is a definite plus, say LPs). They are also expected to capably handle interrogations on the wisdom or otherwise of a particular investment – for the sake of argument, why the firm's backing of a French sandwich chain makes sense despite an investor having heard that the same type of investment in Germany would likely be unprofitable.
Another area of focus for the IR team should be to ensure that investors are communicated with effectively in between fundraisings. Given the other demands on their time, such as helping to organise annual and advisory committee meetings (which, according to one IR head can easily block out three to four months of the year) this is easier said than done. It is also a far from easy task keeping tabs on all the investors, particularly in relation to the largest funds. Those on the IR frontline cite the frustrating stream of email bounce-backs resulting from constant personnel changes at limited partner groups, as well as the need to jet around the world visiting investors in increasingly remote locations.
Such logistical challenges can be made all the more demanding when getting co-operation from colleagues proves difficult. One IR source cites the following example: “You might have planned a trip to Switzerland to meet three or four LPs. It's taken you a number of weeks to arrange it and you are planning to take a partner with you. Two days before the trip, the firm gets into the second round of a deal. Do they walk away from the deal to do the trip? What do you think?”
IGNORE US AT YOUR PERIL
It is clear both from the above anecdote and the previous examples of competing time demands that the need to court investors between fundraisings – which to outsiders might seem all too obvious – can be hard to achieve in practice. Hard to achieve, and yet absolutely crucial given that a failure to do so runs the danger of being interpreted as arrogance by limited partners. And the lesson of the past is that such an undesirable trait generally get punished in the long run.
As a GP, you put off telling LPs the bad news for as long as possible because you hope things are going to get better, and then when the problems really hit, you are probably too busy firefighting to get round to letting them know
Relates one IR source: “There are a bunch of firms that will raise capital easily today. In the late-90s you had the same sort of situation and some funds got arrogant toward investors. As soon as these firms screwed up, LPs had an excuse not to invest with them any more. It's very easy to get complacent when things are going in your favour. But people should remember the downturns of 93/94 or 2001. At the moment there's a huge up-cycle, but it won't last.”
Piers Dennison, investor relations director at listed UK buyout firm Candover, says reporting is one area where GPs might be tempted to let their communications effort slip a little. But he cautions against it. “The reporting cycle is very timeconsuming – that's why it's important to build enough resource to handle it. When times are good, some might be tempted to look for shortcuts, but I feel strongly that you have to treat investors properly at all times. You never want them to see you as complacent. When the next market downturn comes – as it inevitably will – it will be too late to build a positive relationship if you haven't already done so.”
For the time being, the good times continue to roll for private equity firms. But there are some signs of stress beginning to creep into the system amid inflationary and interest rate pressures and waning stock markets. The prospect of looming deal failures begins to rear its ugly head, and, at such times, it's arguably make or break for the investor relations effort. Above all, pre-empting bad news will assume the utmost importance. As with many other aspects of IR, it's a task that's easier said than done, in the sense that focusing on the negative is counter-instinctive. And yet a failure of communication at this point could be disastrous.
Simon Thornton, former head of IR at pan-European buyout firm BC Partners and secondaries specialist Landmark Partners Europe, offers a theoretical example: “If you're a fund of funds, you don't want one of your LPs phoning up to ask about a portfolio company of an underlying fund that has just gone bust when you didn't know anything about it. That makes you look like a schmuck. But as a GP, you put off telling LPs the bad news for as long as possible because you hope things are going to get better, and then when the problems really hit, you are probably too busy firefighting to get round to letting them know.”
As and when market conditions deteriorate, the way in which GPs interact with their investors gets brought into sharper focus. Those IR teams that perform well in such circumstances will likely be those that have an exceptionally thorough understanding of the way their own firm operates, are given seniority within the organisation, and are able to organise their time efficiently to make sure that no investor ends up feeling neglected.
But that's not the whole story. To return to the point made at the outset, the burgeoning scale of private equity as an asset class has not necessarily resulted in a significantly increased IR effort (not yet at least). What is more, such an effort could prove counter-productive if not executed in an optimal way. One IR insider offers the view that having a large dedicated IR resource could be worse than having no such resource at all if it meant that senior management then relinquished all responsibility for communicating with investors. He argues that only when the IR and deal teams stand shoulder to shoulder will LPs be provided with the high quality and deep level of information that they increasingly require.