IR Profile: IK Investment Partners’ Mads Ryum Larsen
IK Investment Partners’ latest mid-market buyout fund – the €1.85bn IK VIII – was its first vehicle raised without a placement agent. The Drawdown speaks to partner and head of IR, Mads Ryum Larsen about raising the fund in-house.
The Drawdown (TDD): When was the decision made to raise IK VIII in-house?
Mads Ryum Larsen (MRL): In any firm’s evolution, you come to a point when the IR function becomes larger, so your dialogue with the investors is more continuous than a fundraising-driven function, and we came to that conclusion after we raised our first small-cap fund. After that process, we had the feeling we’d be in the market pretty much all the time - either in a marketing capacity, or a pre-marketing capacity - so in that sense, we will have a good understanding for our own ability to raise capital.
The key driver for IK in terms of deciding not to use a placement agent for the IK VIII Fund was confidence in the strong support among our existing investors and a good number of new potential relationships that meant we would have a significant conversion rate, so we could reach the targeted hard-cap without external assistance.
TDD: In what ways did the process differ with in-sourced fundraising efforts?
MRL: For me, the key aspect I always focused on when hiring a placement agent was their ability to support in a corporate finance capacity: the positioning of the fund, the preparation of the marketing materials, PPMs, DDQs – all of those preparational steps. The secondary factor was their reach out to investors.
One advantage of running the process in-house is that you will have a more concentrated process, in the sense that your conversion rate will be slightly higher. That’s an advantage for the investment staff, because they spend less time on the road and when they participate in meetings they can see the likelihood of getting the LPs on board is very high.
The downside of not using a placement agent is that we didn’t reach out and see as many potential investors as we could have. In the US, we didn’t get to do many roadshows, which would have been great for the next fundraising, as there will be more pressure on our marketing activities between fundraises. For IK right now, we’ll tend to raise most of the capital in Europe and east-coast North America, and have limited access to other sources of capital, which is obviously somewhat a trade-off.
A recent development for us has been that we raised around 40% of our capital from North America, so for the first time we had due diligence sessions lined up in New York. We flew five or six partners over so some of the North American investors could do their “on-site” due diligence in New York rather than come to London, which I think rendered the process more efficient for us as well for them.
The advent of the digital data room has meant more and more information is made available to investors, so for me it has been a key development that we are able to populate the data room with enough information for investors to have a serious first look at a fund. Also, that amount of information and the fact that we had the dialogue ourselves - a quite concentrated dialogue - meant the conversion rate of investors who went from due diligence to commitment was extraordinarily high.
Of those LPs who went into on-site due diligence, the conversion rate was probably more than 90%. The LPs have been able to sift through the information more extensively and in a very busy market, LPs don’t want to waste their own time on the due diligence that our data can cover.
Those have been key drivers in a very efficient fundraising process.
TDD: How did you develop relationships with new LPs for fundraising without a placement agent?
MRL: It’s a mix of several different sources. First is that IK will always be in dialogue with our existing investors, and occasionally that conversation turns to who they think we should be seeing. Our fund-of-funds investors would represent underlying LPs and some of these will at some point in time want a direct relationship with a fund like ours, and then the fund-of-funds can introduce us as part of the service they offer their clients.
Second, an interesting point for me is that there’s a lot of attrition among LPs, which means you might see the relationships you have at one investor move to new LPs, which expands your network as well.
Third, we develop relationships through gatekeepers and consultants. To the extent they support IK, they would then also be supportive in terms of promoting us to their client base and getting us in front of their clients early on.
IK also participates in four or five conferences a year: The ILPA conference in New York, the Nordic Fundraising Summit in Copenhagen, SuperReturn and SuperInvestor, as well as the BVCA roadshow in the US where we meet a lot of new LPs, which we probably wouldn’t get in front of otherwise.
TDD: Do you still see value in using a placement agent?
MRL: Definitely. There is value for us. Every time we will raise a new fund, one of the key decisions will be whether to use a placement agent or not, and whether to use a placement agent responsible for the overall fundraising effort, or one which has a more geographical role.
Therefore, we’re not ruling out using a placement agent again, but once you reach a certain size and have raised a number of funds, I think you need to have a lot of the placement agent’s abilities in-sourced.
A placement agent to a smaller fund or startup brings a stamp of approval but, IK has raised nine funds so I believe we can stand on our own legs and don’t really need that stamp of approval any more.
What we will be doing is probably using placement agents in the future for more local mandates or specialised mandates such as marketing in Asia, Latin America or the Middle East. IK has the ability to raise capital from sources close to where we are, but if you really want to diversify your investor base, say tap into Korea and Japan, you need to have a placement agent also for regulatory purposes. The further away you get from your home base, the more important it is to have a placement agent.
TDD: How has the IR role changed in recent years, and what new challenges do IR teams face?
MRL: The role of the IR function in general has evolved over the last 15-20 years. Before, you had a finance function that would do the reporting and maybe one IR person, but most GPs didn’t. You’d then have an active dialogue ahead of the fundraising, and then the dialogue thereafter would maybe be more limited.
Now it’s more continuous; the demands among the investors are significantly higher, transparency in the industry is higher and LPs require a much more regular dialogue.
From our point of view that also means we have a much better feel for how our LPs view IK, how we’re viewed compared to our peers, what our ability to raise capital is, and the quality of our reporting. So I think today you have a much better idea of where you’re sitting within the food chain of the industry. The relationships now are much deeper than they used to be.
I think there is a general appreciation among PE firms that IR is more integral and core to the firm and less of a back-office role than it used to be. You can see in some of the largest and most successful US PE funds, the CEOs had effectively been head of IR as well as an investor, so there is an increased appreciation of the role.
That also means the IR function in general is taking on more responsibility in terms of investment policy as they will be heavily involved in any equity syndication to LPs, which is very important for fund-of-funds and the very large pension and sovereign wealth funds. Those responsibilities increase demands on employees so you’re seeing the quality of IR people at every level approaching what you see on the deal side.