Private equity firms have arguably never had a greater need for good investor relations staff. LPs are getting more demanding; competition for capital is getting tougher; negotiations are more complex; the regulatory backdrop is changing constantly. In this kind of environment, the value of having a strong and effective conduit between manager and investors is abundantly clear.
However, if GPs recognize this, they’re not always putting it into practice, according to new research by Stevenson James, a private equity executive search firm with a specialism in fundraising and IR. It asked a number of LPs how they think a GP’s IR function ought to work, whether it’s currently measuring up to expectations, and what the pressure points are likely to be in the years to come. And the overriding message that emerges is that the industry still has some way to go.
There’s no doubting the significance of this issue, as far as investors are concerned. All the LPs surveyed rated the IR function as “important” or “very important”; some even went so far as to describe it as “crucial” or “the main point of contact” or “the one we would develop the strongest relationship with”. The consensus was that IR should be the first port of call for LPs and act as a bridge to the investment team – so their role should cover everything from portfolio updates, to ad hoc data requests (particularly during or even ahead of a fundraise) to fee negotiations.
So how well are firms delivering this in practice? It varies, according to this survey: 94 percent said the quality of IR differed massively between different firms. Some said GPs had raised their game substantially in the last few years (the “penny had finally dropped”, as one put it).
But around one in five LPs said firms were still inadequately resourced in this area. “Pitiful” was one LP’s withering verdict; “some are good, some are awful” said another; “some GPs still think they don’t need an IR function,” said a third.
One issue seems to be a mismatch of expectations. Although relationship management skills were considered the sine qua non for IR people, well over half of the LPs surveyed also suggested that direct transaction experience was preferable. As Stevenson James points out, that’s probably not surprising: as GPs experiment with different deal and funding structures, direct investment experience ought to make it easier for IR people to communicate to investors what’s going on. But at the moment, fewer than one in three LPs think IR is currently performing this conduit role adequately.
One thing’s for sure: the IR role is only going to get harder. The majority of LPs expect their needs to increase in the coming years – whether that’s in terms of analytics, information requests, co-investment deal flow or regulatory requests – while it also seems likely that IR people will end up playing a more prominent public affairs role. According to Stevenson James, more than 80 percent believe GPs will struggle to meet all those needs.
Here’s perhaps the oddest statistic from the survey, though. When LPs were asked whether they’d taken up their concerns about IR failings with specific GPs, just 30 percent replied in the affirmative. That adds up to a lot of investors who are unhappy with the service they’re getting, but are not actually doing anything about it. Until that changes, it’s hard to see this issue being resolved to their satisfaction.