A great investor relations officer’s resumé doesn’t just fall from the sky at the moment it’s needed. This is a fact that’s not lost on private equity companies, an asset class increasingly short of good IROs.
According to John Mackie, CEO of the British Venture Capital Association (BVCA), an industry body, private equity is definitely seeing more interest from pension funds and institutions. Mackie points out that 15 or 20 years ago a lot of private equity firms would have had a part-time role for one or two individuals responsible for fund-raising and doing deals. ‘But now’, says Mackie, ‘we’re seeing many firms, even mid-sized companies, with a dedicated IR person.’
Investors in venture cap funds certainly shoulder higher levels of risk but, with careful fund selection, they can also see stupendous returns. Just how this message is transmitted to investors and analysts is, of course, key.
In the UK there are currently around 45 mid-market private equity firms, most being ordinary no-frills work horses smaller than the large buy-out firms like Apax Partners or Permira. AltAssets, a private equity research house, recently surveyed 16 such private equity houses and found that for all bar two of them, IR was judged to have become ‘much more important.’
Institutional investors are feeding much of the demand for more venture cap fund IR; many of them were badly burnt during the stock market tumble and are now anxious to widen their allocation risk. It’s also a tacit admission, says one industry analyst, that many fund managers were previously unprecedentedly reckless or stupid – ‘or often both,’ he says – with client money.
‘Many big institutions had a very ad hoc approach,’ he adds. ‘And several simply invested with people they knew and liked, without looking closely. Now many are hiring private equity practitioners and setting up private equity teams. The clear implication for private equity funds is that they’re going to be scrutinized much more closely.’
Headhunting IROs
This explains the IR scramble, but the signs have been hovering for a while. A Treasury-sponsored report produced by Paul Myners suggested that large institutional investors should think seriously about committing more funds toward private equity. Myners even prescribed a series of steps to nudge the process along. ‘Some of his words have really been seeping into people’s consciousness,’ suggests Chris Davison, head of research at AltAssets. ‘Many investors haven’t been getting any return in the market; private equity offers the promise of notional returns.’
Craig Donaldson, head of client services at private equity firm HG Capital, also says there’s clear evidence private equity funds are on an IR spending spree – but they are being picky. ‘Some aim to fill a more junior, administrative-type role, while others want to fill a leading partner position,’ he explains. ‘But it takes an incredibly high level of experience to do the job. You can’t just take people from any asset class and make them effective IR officers; [if you do] you simply won’t have any credibility with clients. You have to understand the business in hand. Most of the good IR people in the business have been in investment management a long time.’
For those with the experience, finding a new home shouldn’t be too problematic. But be warned: the private equity class definitely has its own idiosyncrasies. There are no shares involved, which means no regular valuation updates, not even weekly or monthly. It is, basically, a limited partner setup with a general partner doing the rounds of the institutions trying to attract capital for future investment. After they have raised enough financial commitments from potential partners – money is often dribbled in gradually – private equity general managers are then free to look for investment opportunities.
And this is where returns, if your timing is well judged, can far outstrip even the fastest-growing bull market. Take Permira, for example. Last year it sold Homebase to GUS, having bought it from the J Sainsbury supermarket group two years earlier. The return for investors was close to a princely 600 percent.
Bespoke IR
However, as David Bailey of Ansbacher Fund Services, a back-office private equity support operation, points out, such opportunities have to be tracked down with the patience of a wild game hunter. ‘Many managers are now saying it’s harder to find transactions,’ he says, ‘which is why they want to be more transaction-based, and not so involved in the routine back-office stuff.’
It’s also about fostering a far closer relationship with clients than perhaps a traditional IR professional might be used to – and this is a point that private equity financiers repeatedly make. An over-slick IR operation is definitely verboten.
‘Some investors are easily riled by any IRO who seems to push them away from the investment team,’ warns one private equity professional. ‘Some pension funds are also still fairly new to private equity and are much more inclined to make comparisons with other asset classes rather than with other private equity fund managers. The oh, I get very different treatment from my bond portfolio people complaint is a very familiar one indeed.’
Bailey says many smaller firms shouldn’t be knocked for not having a bespoke IRO. ‘Many have an incredibly intimate relationship, with the [managing] director himself sometimes taking on the IR role,’ he notes. ‘Biggest is also not always best. If you or I invest in a Gartmore fund, then there will be someone from Gartmore IR who speaks to us. But if you have a private portfolio with a stockbroker, you know him or her far, far better.’
Martin Williams, head of corporate development at venture capital equity firm Quester, backs this up. ‘It’s very important that big institutions meet and know the people at the sharp end,’ he says. ‘We’re focused exclusively on early stage [venture capital] and we need a senior person, in-house, who understands a lot about it. There needs to be an easy exchange of views, and someone who can answer all the detailed IR questions at the drop of a hat.’
This reporting line has been stretched tighter by new reporting guidelines from the BVCA. Notes on fund leverage, plus debt obligations and contingent liabilities, are now thoroughly covered, as are charges – and private equity running costs are not cheap. ‘Clear statement of related party transactions, benefits and fees must be broken down into principal categories,’ advises the BVCA. ‘Clarity in disclosing the treatment of such issues is key.’
Importance of IR
Institutional clients should also feel happier with the rules rehash, says Davison. ‘One of the defining characteristics of the asset class is the difficulty of producing accurate interim valuations,’ he explains. ‘These are private assets – unlisted – which invite a wide range of methodologies. That’s why there’s a serious need for investor relations to provide explanation.’
Serious is the word. Fees, typically, are not simply a 1.5-2 percent margin; limited partners can find they’re liable for other add-on costs, which, in some cases, can hit 5 percent. If a deal doesn’t work out, an abort cost may sometimes still have to be coughed up – a scenario many investors are none too happy about.
How this all gets handled sees the US well in front, says Davison. The US has a much wider investor base and a longer history of investing in private equity. ‘But since the mid-1990s there has been a lot more investment by UK institutions, Scandinavians, and institutions across Continental Europe,’ he says.
However, Paul Foster of Foster Crouch headhunters, which regularly recruits IR professionals, says private equity firms could look to smaller European companies as examples of businesses with real-world IR sense – because, he says, some multinationals just aren’t getting it. ‘Recently I was talking to the head of IR of a major company operating out of Europe who was looking for a career change and I asked him how often he talked to analysts and fund managers,’ Foster says. ‘He thought about this and then said, about two months ago. He was surprised when I said I thought contact should be made on a daily basis.’
But it is the private companies in the mid-market range where investment deals range from E10-20 mn to E400 mn that are in most need of IR support, say private equity professionals.
For IROs, then, these opportunities have got to be good news. Investor relations for venture cap funds is plainly on the rise and greater respect is coming with the job. Were all the competing demands here boiled down to their core elements, you would probably arrive at a very basic need: first class communication, and pronto. Anyone up for a change of scene?
