What’s your ‘IR brand’?

As the private equity industry matures, a strong and distinctive investor relations function is proving its worth, especially in a down market. By David Haarmeyer

A good private equity firm brand is recognised as invaluable to attract investors and debt financing, to execute transactions with prospective companies, and to gain talent.

The underlying value of a brand is what it communicates about a firm’s reputation for being trustworthy. “What do people say about you when you leave the room?” is how Amazon’s Jeff Bezos defined reputation. A good brand that promotes market awareness and understanding of a company takes time to build given that by definition good reputations and brands are scarce commodities that must be earned.

Relative to public companies, private equity groups have three distinctive advantages when it comes to building brands:

• They are constantly in the equity and debt markets where their performance and reputation is measured. This intense capital market activity provides an opportunity and incentive to build a reputation for honesty.

• By putting significant personal capital at risk along side of investors and sharing in profits, GP’s interests are aligned with LP’s, thus making them accountable and trustworthy – which goes straight to building a more powerful brand.

• Long-term funds create very different investor relationships, sets of expectations, and operating environments than with liquid investment vehicles. Locking in investor capital over seven to 10 years provides GPs with more flexibility to create value and stronger partnerships with their LPs over the long term.

Thus, the long-term partnership that is at the centre of private equity provides the asset class with certain investor relations advantages. That said, building a truly outstanding IR brand requires hard work, involving frequent communication with existing and prospective investors to build credibility, reduce investor uncertainty, and provide a coherent view of a firm’s prospects.

As GPs have discovered over the past few traumatic years, illiquidity for investors also comes with a cost: LPs are likely to become more demanding and scrutinising. This is where a private equity firm’s IR brand is tested – can the trust and communications infrastructure the firm has developed over time successfully sustain confidence? This is a powerful proposition as it suggests a key differentiator in an increasingly crowded market.

Down market, high-touch IR

The fundraising picture over the past year has not been pretty. GPs out on the road have found it takes twice as long to close funds. LPs are pinched for capital and thus writing smaller checks and allocating them to fewer funds. This has made for an ultra-competitive and time-intensive fundraising environment.

It is during these tough times that IR brands will be stress-tested. LPs of existing funds, for example, have been persistent in pushing GPs for more details on the health of their investments. “Investors are hungry for information; they very much want transparency and want to know what they own today given recent volatility,” explains one US fund of funds manager.

LPs of prospective funds have had the luxury of time and great bargaining power to do more rigorous due diligence. A poll conducted recently by Coller Capital found that nearly half of LPs surveyed had increased their due diligence since summer 2007 before committing to a fund. A US buyout GP who managed to close his fund last year says the process was especially challenging in developing new relationships: “We had several visits by prospective LPs and consultants; provided significant details of our investments, strategy, and management of the back office; and gave detailed references.”

In the opinion of more than a few GPs, the financial crisis did have a silver lining by putting a spotlight on investor relations. One US mid-market buyout GP explains, “The downturn has made us more proactive from the perspective of our IR platform.” While a manager of a European buyout fund, which had a successful close during 2009, notes that its “client-serving model should position it to capture both market and mindshare from its competitors”.

Annette Wilson, managing director and head of investor relations and marketing at Palamon Capital Partners in London, thinks that there has been a sea change in LP expectations over the last year. “In the past LPs were more forgiving of good performing funds that did not provide appropriate reports on a timely basis, but given that some of these same funds have turned in weak results, the expectations around reporting and administration quality have risen.”

Ben Cahyono with Delaware Investments, a major backer of private equity funds, echoes this sentiment in noting that in today’s environment, “a private equity firm’s IR brand can be a real competitive advantage.” When the economy rebounds, he says, “those GPs that went the extra mile will be rewarded by LPs”.

Despite many setbacks and challenges it presented, the economic downturn also had a silver lining for investors. This came not only in the form of access to potentially better vintage years and top-flight funds, but in securing important investor relations benefits. “The downturn is giving us many opportunities to improve alignment, transparency, reporting with fund managers,” says a manager of a large North American pension fund.

IR brand ingredients

LPs and GPs have a wide opinion on what makes for a good IR brand. But generally, as one US fund of funds manager says, “It’s all-around reporting, transparency, and communications”. Wilson at Palamon says for her, the most important attribute of a strong IR brand is “transparency coupled with thorough yet concisely presented information issued on timely basis”.

A firm that invests in better investor relations should indeed expect a return on investment. One imperfect measure of investor relations ROI is how often investors reinvest with their existing private equity firms when a new fund is brought to the market. According to Coller Capital’s Global Private Equity Barometer, in the past year only 16 percent of LPs reinvested with their current private equity firms compared to 55 percent in 2005. As indicated in the chart below, poor reporting and transparency are among the top four factors deterring investors from re-upping and are the factors showing the greatest increase over the winter 2008 to 2009 period.

Cahyono at Delaware Investments boils down the attributes of a good IR brand to “PITA” – he is looking for GPs with fund administration capabilities that are proactive, innovative, transparent, and accessible. These attributes indicate that investor relations functions are both customer relations management (CRM)-specific and are dynamic – there is a constant search for better ways of communicating, interacting, and sharing information.

Investor appetite for information may move the bar again as to what constitutes quality investor relations. Earlier this year at the SuperReturn conference in Berlin, Erol Uzumeri, head of private equity at the Ontario Teachers’ Pension Plan, said that investors wanted more openness not only on portfolio company performance but on potential deals. His sentiments were echoed by David Turner at The Guardian Life Insurance Company who was of the opinion that private equity executives are not good at telling him on a regular basis “what they’re buying when they ask for a capital call”.

The economics of IR

As the recognised value of a private equity group’s IR brand increases, it raises key strategic and organisational questions within the firm. For example, the increased professionalism, best-of-class CRM, and heavy fund administration infrastructure that are expected to contribute to IR brand excellence represent meaningful investments. These are driven both by intense competition for investor funds and the increasing sophistication of investors who are becoming more “hands on” in building their portfolios and demand customised offerings that are tailored to their risk/return needs.

These drivers are increasing the complexity and cost of investor relations. Private equity funds are expanding their investor relations staffs and as applied to their portfolio companies, beginning to hire “operational talent”. In London, for example, BC Partners recently hired veteran Goldman Sachs banker Charlie Bott to co-head its investor relations group. Bott chaired Goldman’s European financial sponsors group and is expected to focus on helping BC Partners make a big push to diversify its investor base as firm raises its ninth buyout fund. In announcing the recent hiring of two new executives to its investor relations team, 3i emphasised in its press release that the action demonstrated “its commitment to client services”.

Consequently, private equity firms have to think hard about the structure and size of their organisations and options for containing costs, such as outsourcing services. Thus far, most firms are of the opinion that unlike auditing and public relations, investor relations is strategic to the business and should remain in-house. However, many tools and functions that support good investor relations can and indeed should be outsourced, depending on the budget of the firm.

Whatever the mix of resources used, LPs say they are looking for insights into their investments and tools that help them plan and report, not just more paperwork. Cahyono at Delaware Investments may speak for many LPs in observing that “what is really important for me at the end of the day is quality of information provided not the quantity”. Thus, while a $5 billion fund may have more wherewithal than a $500 million fund to churn out voluminous, beautiful reports and hire a chief technology officer, the investor relations function will be judged on how well the information it provides gives investors a credible and coherent view of a fund’s prospects.

Maturity and the IR brand

The increasing attention paid by private equity firms to investor relations is a testament to the growth and maturation of the asset class. Building a strong IR brand for credible communications and near seamless contact with investors has become a key differentiating attribute and powerful competitive advantage. The fortitude of private equity firms to communicate through market cycles helps to build this brand.

Looking ahead, private equity groups face new investor relations challenges, particularly those that choose to go public and that diversify into multi-line asset management firms. The promise is the ability to provide a broader set of financial investment products to its institutional client base, and do so from a broader and more permanent capital base. The potential downside is losing both alignment and focus given widely different groups of investors with different priorities and expectations.

Ultimately, the investor relations challenge for private equity firms is to adhere to a quote from the late Walter Wriston, former chief executive officer of Citicorp, that “money goes where it is welcome and stays where it is well treated”. A big part of doing so requires building a credible investor relations platform that communicates organisational and GP commitment to long-term investors.

David Haarmeyer is a Boston-based economic consultant and writer whose focus is communications and marketing issues around private equity. He can be reached at dhaarmeyer@gmail.com.