Open relationship: outsourcing IR
Private equity is a relationship-based business. And this is especially true when it comes to capital raising and investor relations. Relationships with investors, if all goes to plan, can last for several decades. And like any good relationship, these ones in particular need lots of care, attention, communication, trust and occasionally compromise.
Furthermore, these key relationships can determine the longevity of a manager. Of course, returns are vital, but with so much competition in the market, LPs will continue to back the managers they enjoy working with - the ones they have strong relationships with. Taking all of that into account, why then would a manager outsource their IR function?
In some respects, many managers already outsource a portion of their investor relations work through the engagement of placement agents. Tapping into the broad and established networks of professional capital raisers has become a commonplace method for raising capital and bringing new investor relationships to a manager.
But once the fund is closed, it’s down to the in-house investor relations team to maintain relationships, lead reporting efforts, as well as to strategise for the next fundraise. On top of these demands, thanks to the arrival of secondaries, GP-led restructurings and continuation vehicles, IR teams today find themselves handling an increasingly complex web of relationships and fund structures.
Enter outsourced IR. “Investor relations has become sophisticated and multi-disciplined over the last decade. It is now much more quantitative in nature, meaning a lot more goes into the running of an IR department. Having an outsourced solution to manage the needs of the fund is now critically important,” explains Tyra Jeffries, founder and CEO of CCA Global Capital Group.
Despite private equity’s gradual acceptance of outsourcing when it comes to functions such as fund administration and IT, the prospect of using a third party for investor relations may be a step too far for some managers. “The fear of losing control can be an initial reaction for some,” explains Jeffries. “The idea that you’re outsourcing your most important relationships can be daunting. But in reality, outsourcing IR deepens the relationships; it provides managers with a much larger team allowing things to run more effectively. As demand for transparency by LPs continues to grow and a deeper level of transparency is now required, especially by institutional allocators, the workflows and obligations put on the firm’s IR departments are only going to expand further. We come in as a plug-and-play solution to strengthen the GP’s ability to scale their IR operations to match those rapidly growing LP demands. It should feel as though the GP has hired – and in some cases expanded – its own IR team.”
Indeed, as LPs vye for more information from their managers, tapping into a dedicated provider focused purely on this function makes sense. “Investors like to have someone they can constantly go to for information, and they expect a quick turnaround. That’s especially true for institutional investors, who typically need information quickly,” says Jeffries.
As noted above, PE firms are au fait with the use of placement agents - so where is the line between a placement agent and fully fledged outsourced IR? It comes down to the length and depth of service. Typically, placement agents are only working with managers during the fundraise, whereas outsourced IR is a constant partner. “Our goal is to take the first two meetings with potential investors,” explains Jeffries. Placement agents are introducers, whereas outsourced IR manages the front of house.
CCA has a network of investors that it brings to the GPs it works with as part of its comprehensive service, and it is this offering that really brings the nature of their work to life. “We build programmes based on the needs of the client; sometimes they have IR people and sometimes they don’t. Often it’s about exposure, for example European managers looking for US exposure; in those scenarios we can effectively be their US team,” explains Jeffries.
Here is a clear example of the important difference between placement agents and outsourced IR. While both can provide that exposure to new investor networks, an outsourced IR can maintain relationships with that network because it has the proximity. “Covid has really driven this offering home,” says Jeffries. “With IR professionals having been unable to go out on the road - especially to the US - being able to access US investors, not only getting there but also understanding the nuances, cultural differences and particulars of each investor, from East coast, Midwest through to West coast; there are differences that you need to be aware of in terms of how business is conducted.”
Engaging with any third party requires time and effort upfront - so how does it work for outsourced IR? “We have to do a deep dive into the business and their deals; we have to really understand them. Our team is very quantitative, so we really dig into the investments and go from there, thinking about the business on a competitive level, then we do our analysis. It takes time, and how long it takes depends on the complexity of the firm along with defining and understanding its fund and overall long-term business strategy. From doing that work, it makes sense for us to go on the fundraising journey and allows us to speak intelligibly on our client’s business to LPs,” says Jeffries.
While it might feel unnatural to outsource the IR function, with many PE firms positioning senior partners in control of these precious relationships, the increased demands on IR teams makes the case for outsourcing more appealing. IR teams undeniably face more pressure and complexity than ever before, so the ability to tap into a pool of professionals makes a lot of sense in today’s market.
Or viewed from another perspective, large private equity firms are only getting larger, and that is partly due to the bandwidth of their IR teams; more people means more contact with the LP market. “One person can be a rockstar, but they’re only one person, and there is still a tremendous amount of work that has to be done to be deemed an attractive target for institutional allocators,” concludes Jeffries.