Meet your IR support network

Behind the scenes of any successful fund close is a team of industry professionals tasked to make it happen. Their work has never been easy, but few would deny that the challenge in securing investor commitments has intensified in recent years.

It’s pretty much become gospel that in a post-crisis world, limited partners want fewer GP relationships on their books. They are exasperatingly selective when considering new commitments and ending existing relationships with managers that don’t meet their portfolio needs or returns expectations. General partners – many of whom put off fundraising to try and avoid adverse conditions – are bumping shoulders on a more crowded fundraising trail, which also comes with more regulatory obstacles than it has in the past.

Consequently many GPs are becoming more reliant upon their placement agents, fund formation lawyers and internal investor relations staff to stay competitive. And as PE Manager discovered during a recent Investor Relations roundtable in mid-town Manhattan held in early May, how these various professionals work together is sometimes just as important as their engagement with investors themselves.

There’s a benefit then for private equity managers to better understand how these professionals view their work, and engage with one another, with the common aim of enhancing the firm’s investor relations strategy – even more so now that fundraising has become a far more exhausting exercise. 

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MEET THE ROUNDTABLE

Patricia Grad is the head of investor relations and a principal of Irving Place Capital. Prior to joining Irving Place in 2010, Grad worked as a vice president of investor relations at Oak Hill Capital Partners, where she worked from 2004 to 2010. Before joining Oak Hill, she worked in alternative investments at JPMorgan’s Private Bank and at Cambridge Associates, where she worked on the private equity research team.

John O’Neil is a corporate partner at Kirkland & Ellis and is a leader of the law firm’s private funds group. O’Neil regularly advises clients on a wide range of on-going operational issues as well as extraordinary events involving private investment funds and their sponsors. He is a founding member of the New York Investment Funds Society, a group comprising New York City attorneys extensively advising investment fund sponsors.

Steve Standbridge is a partner at Capstone Partners, a global independent placement agent. Standbridge is responsible for distribution and business development in the Northeast and Eastern United States. Prior to joining Capstone in 2002, Standbridge was the director of investor relations for Crossroads Investment Advisers, a Dallas-based private equity fund-of-funds. Previously, he was a senior vice president with Bank of America in Chicago and a vice president with the First National Bank of Chicago.
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 Of course each firm’s investor relations strategy is different, but one common element should be regular communication between all relevant parties, says Patricia Grad, head of investor relations at Irving Place Capital, a New York-based mid-market firm.

“During fundraising, some firms conduct weekly calls with senior partners, internal investor relations staff and placement agents,” says Grad.

“Many GPs also rely on their investor relations staff to maintain constant contact with placement agents and LPs, and then communicate status updates to senior colleagues,” she adds.

Steve Standbridge of Capstone Partners, a placement agent, addresses the comment by describing the relationship from his vantage point. “Every GP has their own way of operating, so what we do upfront is discuss how to build a relationship which best meets that client’s needs.”  

He elaborates: “We work both with groups that have internal investor relations professionals and those where the managing partner is leading the fundraising effort. Both work well but with a dedicated investor relations professional there is less risk that the process gets slowed by competing priorities on the deal side.”

Reiterating the importance of communication, Standbridge says an in-house investor relations specialist can be more responsive to his firm’s requests, for example refreshing the firm’s data room or portfolio company summaries, which LPs undergoing due diligence will expect to be updated on a timely basis.

“Internally we have a meeting every Monday to discuss our clients,” Standbridge continues. “If a fund is stalling during a raise, we will discuss the issues and determine if we need to alter the fundraising strategy.”

These answers need to be swiftly brought to GPs’ attention, says Standbridge, adding that can only happen when both parties have each other’s ear. 

A third party to these types of conversations is often the firm’s legal advisor. John O’Neil, a private funds partner at law firm Kirkland & Ellis, says the importance of a strong investor relations team cannot be overstated.

“Part of my role is to remind everyone about the unprecedented level of regulation the industry must now come to terms with. And complying with these rules is not just an area of focus for regulators, but investors as well.”

O’Neil says lawyers, placement agents and investor relations staff need to all be on the same page in the creation of marketing materials, as well as the firm’s overall brand image.  

“Marketing documents, websites, data rooms and so on are constantly being updated as GPs try to position themselves in a competitive marketplace,” says O’Neil. “The challenge here is maintaining consistency across these various channels of information, which regulators require firms to do.” 

O’Neil uses a popular word at the roundtable, communication, to explain how placement agents, GPs and lawyers can achieve that consistency. 

BEFORE FUNDRAISING BEGINS

With a strong consensus reached that each of their vocations is aided by the others, the three roundtable participants turn their attention to how they are more individually enhancing firms’ relationships with investors. The conversation starts with how firms can build a favorable impression with investors before formal fundraising kicks off.

“One of the big mistakes GPs make is ‘getting out over their skis’,” says Grad. Before fundraising officially commences, Grad says firms will often speak informally with dozens of investors to gain a sense of appetite for their next fund.

“The problem is not being ready with all the right details and answers to LP questions – if you’re premature in your LP meetings, you risk forming a negative first impression.”

Standbridge adds to the point a second risk: the loss of fundraising momentum. “The moment an LP hears of your fundraising intentions, even if they’ve not formally begun, that’s started the clock. Coming back to that investor a year later with the official documents makes it seem like you’ve been searching for commitments all that time, which may lead them to wonder why you are still in market.” 

And as placement agents and investor relations staff begin to map out their fundraising strategy, O’Neil notes that Europe is becoming a greater compliance risk for firms hoping to access the continent’s institutional investors. The Alternative Investment Fund Managers directive, which EU member states must implement by 22 July, is set to radically transform how the private equity industry will operate in Europe.

“With respect to how firms can approach investors in Europe, it’s an issue that will evolve week by week until 22 July,” says O’Neil. “Before that time comes, we’re advising GPs to identify which investors they hope to sign commitments with. Once the directive takes effect, some firms may end up relying on a reverse solicitation exemption where applicable, meaning investors are the ones to approach them about a fund commitment.”

Grad adds that extra precautions may need to be taken for firms relying on the reverse solicitation exemption while fundraising in Europe. “It’s a task that may require more careful documentation of communications with investors.”

It is here that O’Neil reiterates the need for sufficient dialogue between everyone involved in the fundraising process. “One wrong marketing document sent to an EU investor can trigger a violation of the directive for a firm relying on reverse solicitation.”

Months after the directive has taken effect, O’Neil believes the need to rely on reverse solicitation will have been reduced. “No one wants to be the first marine storming the beach to send the right disclosures to investors under the directive and file all the necessary regulatory filings in these jurisdictions. But once enough firms have undergone the process, best practices will emerge and it will all become part of everyday process.”

DURING FUNDRAISING

To impress investors, GPs must also have in place a strong message and brand understood by everyone within the organization, the roundtable agrees.

“I remember one case where a LP came in for their final due diligence meeting and asked the more junior members of the team about the firm’s investment strategy and identity within the market. The junior team members’ message was not consistent with what the senior partners were saying, and so the LP ended up pulling away from the commitment,” recalls Standbridge.

Messaging is a critical factor in winning over investors, agrees Grad. “It’s important that most people at a firm are prepared to speak with LPs – who have just so many more questions – without sounding rehearsed.”

Grad provides a few examples to buttress her point. “Where do you see yourself within the firm in five years is a question that everyone internally needs to know the answer to. Succession is such a big issue in private equity because LPs are locked into funds for a decade, and so they reasonably want to know what the future leadership might look like.”

Standbridge continues the line of thought, saying that LPs often ask about how people are promoted within the firm; who various staff members see as leaders within the organization; what the firm’s typical deal looks like; and so on.

“To summarize, they want to know about the culture of the firm. LPs can tell very quickly which firms are just a bunch of deal partners who have a support network underneath them and which groups have created a unified organization,” says Standbridge.

The roundtable continues to share similar anecdotes while on the topic of courting investors, noting that every LP has a different style to their due diligence process, ranging anywhere from a two hour interview with a handful of senior partners, to exhaustive sit down conversations with dozens of employees straight down to the analyst-level – which can include questions as detailed as where they were born and what high school they’ve attended.

For his part, O’Neil provides insights from the perspective of a legal specialist, noting that lawyers too can become part of LP’s due diligence process.

“This is the ultimate repeat business, and so the firm’s counsel has a role in supporting the client’s reputation within the industry.”

O’Neil explains that the private equity business is a tight-knit community, resulting in fund formation lawyers often encountering the same LP lawyers on the other side of the negotiating table. “A funds lawyer with poor negotiating skills, or who doesn’t understand the intricacies of the industry, or the current state of market terms, may reflect poorly on his or her client.

“It’s my responsibility to understand that investors are our client’s clients,” says O’Neil.

AGREEING TERMS

Negotiating the terms and conditions of the fund’s governing documents is in fact a key element in maintaining a healthy relationship with investors, all three roundtable members agree.

That popular word, communication, makes a reappearance at the mention of LPA negotiations. The panelists underscore again the strong need for their three respective professions to collaborate during the GP’s drafting of proposed fund terms. Each party offers a unique perspective on what terms the market supports, with many law firms, placement agents and investor relations team tracking fund terms through internal databases.

“Sometimes the GP will still come up with what we call a wish list of terms that we consider over the top,” says Standbridge. “We’ll advise them to reconsider the terms, warning them that their credibility is at stake if they don’t start with something reasonable.”

Standbridge offers the example of deal fees to demonstrate his point. “Going through each item of the term sheet, we’ll say this makes sense, this makes sense, now wait…you want a 50/50 transaction fee split between the fund and firm. Well the market is at an 80/20 split, and LPs are asking for a 100 percent offset on management fees. So let’s be realistic here.”

And if no resolution can be reached on a specific fund term, adds Grad, there’s a risk from an investor relations perspective. “We have to trust our legal counsel that any sticking points will be brought to our attention to see where we can compromise.” 

O’Neil agrees, saying that his job is to patiently address each LP concern during negotiations. “Beating your chest on one specific term can end up frustrating the negotiating process.”

Standbridge adds that placement agents, and investor relations professionals can play a more subtle role in the negotiating process. “We know our LPs best, and if there are four or five certain investors that we know typically send a 25 page list of comments to every draft fund agreement, we can give counsel the heads up on what to expect, and what issues those investors genuinely feel are most important.” 

His advice resonates within the room, reminding the roundtable how the conversation first started. Investor relations is a multifaceted issue whose importance cannot be underestimated in the current fundraising environment, and likely for the foreseeable future. Indeed GPs who once relied on a strong track record and the right investment strategy have discovered that they now also need an effective cast of supporting characters to take on the fundraising trail.