Gaining an edge

You don’t need us to tell you that investor relations has gone from being an exercise in quarterly reporting (really only enhanced during times of fundraising) to a full-blown operation that involves full-time staff dedicated to the job.

But there’s a few rather less obvious changes happening. pfm regularly speaks with LPs and GPs to get a sense of how successful private investment firms cultivate a strong relationship with their investor base. Throughout the following pages we share some of those insights, including for instance a look into what tiebreakers LPs might use if two GPs are equally attractive on all the important stuff like performance and team stability.

But before we begin, we just wanted to highlight a few other key observations we’ve gathered from those conversations:

Fundraising means all hands on deck: It was once up to the senior dealmakers to convince investors that the fund manager was worthy of an LP’s trust. That’s still true, but today more and more LPs also want to speak to the chief financial officer, chief operating officer and increasingly the chief compliance officer (with some LPs flat out asking the CCO for a copy of any SEC deficiency letters they’ve received, which of course will result in some careful conversation about what each deficiency means). Consequently, GPs say they’re learning to better coordinate their senior members’ time to allow LPs to meet and greet the firm’s top leadership at one convenient time.

The fee debate is asset class specific: For some time now GPs have been hearing about investors’ ability to negotiate lower management and carry fees. At a time when LPs have reportedly seen a rise in negotiating power, this might seem unsurprising. But a careful examination of the data (provided by law firms tracking these kinds of fund terms) shows this not necessarily to be the case. At least not always. Instead, sources say, fee negotiations tend to be dependent on things like fund size and investment strategy. Investors looking at core real estate or infrastructure funds for instance are wanting long-term stable returns, says Kelly DePonte, a partner with placement and advisory firm Probitas Partners. “And because there’s less risk to manage in funds like this, LPs will push harder for lower fees.” On the flip side, higher risk strategies like opportunistic real estate funds or venture capital mean better chance of the 2 and 20 model holding true.

LPs are easily bored: After spending countless hours polishing their marketing materials and presentation decks, many GPs are walking into LPs’ offices feeling confident about their chances. But based on conversations we’ve had, it seems many investors are yawning at PowerPoint presentations that spend 40 slides explaining why a GP is top-quartile and a cut above the rest. “All that is well and good; but what I really want is a honest and unfiltered conversation about if it makes sense for us to partner with each other,” says one LP on the matter. At a time when LPs can, on the whole, afford to be more picky about who they invest with, GPs must find ways to build a foundation of trust with new investors. For some LPs, that clearly means having a candid conversation with the GP before the pre-prepared marketing pitch can take place.

Taken together, it becomes more evident that the firm’s investor relations function is one that will continue to evolve and to demand more time and attention.