The communicators: Investor relations in Asia

Distance has always been a challenge for Australia-based buyout firm Pacific Equity Partners (PEP). An investor from New York is 14 hours behind Sydney and the flight time between the two cities is upwards of 21 hours. Effective communication with the LP base is therefore a matter of balancing intimacy with efficiency.

In addition to the annual general meeting in Australia and mid-year gatherings mainly held in London and New York, PEP's ongoing engagement with investors is divided up by geography. This was until recently coordinated by an investor relations-focused managing director who worked with different deal team counterparts. Now, though, the balance has been reversed: the investment professionals are formally accountable for LP relationships, supported by administrative-level IR.

"What we've noticed is that individual managing directors become better investors if they are spending a significant portion of time with LPs themselves," says Tim Sims, managing director at PEP. "They get to understand LPs' needs, and the variations within the investor base. As a result, when they look at investments they do so with the voice of the LP in their ear, so there isn't a separate group off somewhere trying to understand the world of LPs."

If you only show up every three years, you end up re-selling your fund each time, which is a much tougher way to build a long-term relationship with your investors – Stuart Schonberger

This speaks to the size and structure of GP's senior team. PEP has 11 managing directors who share responsibility for every deal: each one has a power of veto over transactions; no fewer than two are responsible for a portfolio company; and an operating committee regularly reviews investments to ensure that resources are being deployed efficiently. Sims claims that all the managing directors are therefore intimately familiar with the entire portfolio.

PEP's approach also represents a novel approach to IR by Asian standards, yet one that appears to address long-held LP frustrations about investor relations professionals that stand between them and the deal-makers while adding little value to the relationship. Few others plan to adopt this model - indeed, some question whether it is sustainable - but the debate as to whether IR warrants additional resources is over. The question is more how they can be provided.

"There is a lot of work to do, but the recognition of that value only becomes clear when you look back and say, ‘If we had been explaining what we were doing all the way along then the LPs would be much more comfortable with our strategy.' If you only show up every three years, you end up re-selling your fund each time, which is a much tougher way to build a long-term relationship with your investors," says Stuart Schonberger, managing director and head of IR at China's CDH Investments.

A heavier burden

There no such thing as a guaranteed re-up in Asian private equity as many LPs continue their post-global financial crisis policy of spreading their allocations among a smaller number of managers. At the same time, institutional investors want more information from portfolio GPs in order to meet an array of regulatory and fiduciary requirements. Quarterly reports and briefings must come furnished with more detail, which means private equity firms need people to handle this workload.

If the driving factors behind IR are clear, the industry best practice response is not. "It all depends on what functions you want the IR person to perform," says Mounir Guen, CEO of MVision. "When you form a fund you need to ask certain questions. What is the constitution of the investor base? And what are the requirements of this investor base? How do you communicate with them? How do you ensure you are being proactive rather than reactive?"

Size is obviously a consideration. While global firms have dedicated IR teams that market a range of products on a continuous basis, a mid-market GP on its first and second fund seldom has the resources to pay for an extensive back office or the LP base to warrant a senior or even mid-level IR function. All activity revolves around the founders. In this context, the most interesting firms are those in the middle - the ones that have tried to institutionalize processes without diluting the secret sauce that enabled them to achieve scale in the first place.

Asked for examples of regional GPs that have taken steps to overcome the founder-centric bias to investor relations, industry participants point to Affinity Equity Partners and Baring Private Equity Asia. The two GPs are said to differ in terms of the extent of their internal resources, but both have come up with ways to mitigate the IR burden on founders that are arguably synonymous with their brands.

At Affinity, the primary LP interface has always been K.Y. Tang, the firm's founding chairman and managing partner. However, Queenie Ho, a partner who has been with the GP for 12 years, worked on the last two fundraises and now manages investor relations. According to a source close to the GP, Ho splits her time 50-50 between China deals - previously her sole focus - and IR, and sits on the investment committee, which means there is a high degree of continuity and familiarity.

Baring, meanwhile, brought in Clara Ho to head up partnerships and corporate development four years ago. Prior to joining she spent 16 years with Headland Capital Partners (formerly HSBC Private Equity Asia) in a number of roles spanning investment as well as investor relations. "For that first 18-24 months, Clara was doing meetings with Jean [Eric Salata, Baring Asia's founder and CEO], including full tours of the US and Europe," says one LP. "That model works well - the founder, who everyone wants to talk to, building up her exposure and making it clear he has confidence in her."

These arrangements do not extricate Tang or Salata from engaging with LPs, but they do mean that more mundane requests can be handled elsewhere. "If you have a portfolio company question, you call Clara," another source says of Baring. "It took some time to evolve to this point. Go back six or seven years, you would be calling Jean with those questions."

Large LPs that want to do a call with founders usually get their way. One GP observes that he talks to these groups as often as four times a month, not only fielding questions on the portfolio but also dealing with inquiries about co-investments an LP is involved in as well as requests for general market information. Calls are returned to representatives of these groups at unsociable hours, if necessary, while interaction with smaller LPs is less frequent and channeled through other team members.

"Despite most-favored nation provisions, certain LPs will have more strategic importance for a GP than others. As a result, GPs often maintain a close dialogue with these important LPs," says Javad Movsoumov, managing director in the funds group at UBS.

Power and influence

In promoting someone from within and hiring an experienced professional from outside, Affinity and Baring are looking to supplement these founder-LP conversations with meaningful engagement at other levels. The key issue is credibility. A common complaint among LPs is that IR executives are not sufficiently familiar with the GP's portfolio, the LPs they are dealing with, and the dynamics of the industry.

"Look at the people who get hired to do IR," one LP observes. "You've got someone who is expected to service a client but they have been in the industry for two years whereas the LP has been in the industry for 20 years. It is going to be asymmetrical in terms of why the LP thinks there is value add. If the IR person is just reading from the slide it is not helpful. It becomes helpful when there is an informal conversation that can take place with the IR person and the LP on what the dynamics are internally."

For many, this is where the line between traditional IR and sales becomes apparent. An IR executive with a global private equity firm is supposed to understand an LP's needs and match them to different products. His next step is typically to put the LP in front of someone on the investment side who can talk in greater detail about the products in which interest was expressed. The initial meetings are therefore largely in one direction - an information-gathering exercise for the GP but not for the LP.

Similarly, an investor relations professional with a mid-market firm who is subservient to the managing partners, performing a scheduling and note-taking role, is unlikely to shine during one-on-one meetings with LPs. While there is a need to take minutes and provide updates, much of the value for investors lies in details that exist beyond the spreadsheet. Effective IR is not only about fielding questions on the portfolio but also offering insight into the internal workings of the GP; for example, reassuring LPs that a managing partner with a dominant personality doesn't ride roughshod over other team members to the detriment of investment decision making.

Individuals with experience as placement agents or LPs can perform this role because they usually have a clear understanding of investors' concerns as well as pre-existing relationships within that community. There are several examples of each transition in Asia, although the highest-profile was arguably Hemal Mirani, who moved from HarbourVest Partners to CVC Capital Partners - where she worked on the GP's fourth pan-regional fund - and then back again.

There are also a few anomalies in the region; successful IR professionals who do not come from a placement or LP background and do not have substantial deal experience, but rather owe their status to longevity and the deep understanding of the GP that comes with that. For instance, Schonberger is head of IR at CDH but is also a member of the founding team that spun out from China International Capital Corporation 14 years ago.

CDH has evolved into a multi-strategy firm, with US dollar and renminbi-denominated PE funds as well as mezzanine and wealth management offerings. On reaching this scale, GPs typically employ analysts within the IR team who are responsible for running the numbers and in doing so perhaps develop a more granular understanding of deal flow than their superiors. They also build relationships with same-level peers on the LP side, which means they come to appreciate the investor perspective as well.

With this in mind, Schonberger observes that an effective IR professional doesn't necessarily have to be a senior managing director. "The IR role needs professionals who can communicate what is happening on the deal side in a way that's easy for LPs to understand," he says. "The LPs can get more value out of their meetings with the deal teams if the IR team has provided the proper background. A direct meeting with a deal team is not always the best way to understand a GP's strategy."

Part of the skill set is knowing when to bring the partners into a discussion and when to handle it on one's own, all the while retaining the LPs' confidence. "I want LPs to see me as someone who can talk to them directly but who can also facilitate access to the partners if they need it," says Lisa Herrell, Director of Investor Relations at The Longreach Group, which she joined in 2007 from Denning & Company, the placement that worked on the GP's first fundraise. "I think they know I have the partners' ears and vice versa."

In this sense, a senior IR executive who has access to the investment committee can make a big difference, because it is easier for them to represent the LP view. Herrell, for example, sits in on investment committee meetings and then once a quarter makes a presentation outlining the feedback she is receiving from investors and how the GP could factor that in.

If there is no mechanism through which LPs can channel concerns through to the GP - assuming that managing partners are not available on a regular basis - the ramifications could be as serious as a mistimed, and unsuccessful, fundraise. Much could rest on an IR professional's willingness to speak out on certain issues, even it involves facing down superiors. This is easier for someone who already works for the firm or has relevant industry experience.

Stay or go?

A further challenge for PE firms is keeping an effective IR professional once they have found one. While a member of an IR team working for a GP that runs multiple strategies will be in the market all the time, their counterparts at single strategy firms may find themselves over-utilized during a fundraising process and then underutilized for the three years. Not everyone is suited to sticking around.

There are other options, with certain placement agents offering a continuous outsourced IR function. The nature of this role can vary substantially, based on the requirements of the GP and the size of the placement agent; a larger agent might struggle to provide a full suite of services to a China GP because this could limit its ability to take on a fundraising mandate for a similar manager. However, there are reports - chiefly from Europe - of boutique agents helping to organize AGMs, mapping out communication strategies, and arranging meetings with current and prospective LPs.

"The concept is if you hire somebody full-time you aren't going to get a high quality individual because they won't want to sit on their hands for four years and then work insanely for one year," says one placement agent, who does not offer these outsourced services. "The boutique agent says, ‘Why don't you use us and we can regulate the resources within our own team in exchange for a retainer."

Another industry participant who spoke to AVCJ considered launching this business model in Asia, going so far as to approach several mid-market GPs and inquire whether they would be willing to buy one day per week of his time. The general response to this approach was favorable but the economics were not. The pricing point was on a par with PR rather than IR, and the industry participant concluded that - hypothetically speaking - he would need 10 clients as opposed to five, which meant the time-compensation metric wouldn't work.

It comes back to how much GPs are willing to pay for what kind of service. Outsourcing the IR function might be economical but it could send out the wrong message to LPs. "If you don't want to control how one of your most important constituents interacts with you then you are missing something about the business you are in. It is very people-driven and you have to take the time to form relationships," one investor says.

By the same token, placement agents should not be seen as a replacement for an in house IR function. Even if an IR executive represents the views of LPs, they are still part of the GP; the real value of a placement agent lies in its relative independence. They help with the packaging of ever larger amounts of due diligence material, but more importantly, draw on experiences with other managers and existing relationships within the LP community to identify investors most likely to respond favorably to a particular product, when to approach them, and how to push their buttons.

That a placement agent is not wedded to the success of a single fundraise cuts both ways. If a certain manager is not getting traction with LPs, they may push less hard - not only in order to focus on mandates that are more financially rewarding, but also to preserve their credibility in the eyes of LPs. This impacts how GPs use and also compensate agents, for example by awarding specific mandates intended to bring in a new sub-set of LPs.

However, the objectivity of the placement agent can be vital when fashioning an investment narrative, deciding on a fund size, and pinpointing a launch date. This is because LPs are far more willing to give honest feedback on a GP to a placement agent they know well than to the manager directly. Even an experienced in house IR professional might find it difficult to replicate such strategic input.

"It is one thing for a GP to keep in touch with LPs and provide regular updates, but that relationship crystallizes when a GP asks for a check for the next fund. Many LPs are consolidating LP relationships and their underwriting processes are becoming more stringent. As a result, some LPs will not re-up with their GPs," says UBS' Movsoumov. "From that perspective, the receipt of honest and precise feedback early on is invaluable."

No turning back

Several industry participants note that PE firms used to rely far more heavily on placement agents to get up to speed on LPs, even those within their own investor bases. Now there is more of an appreciation of how a consistent culture of communication can facilitate a fundraising process. As such, there is no turning back. Niklas Amundsson, managing director at Monument Group, observes that in the previous cycle only funds of $1 billion or more had dedicated IR people; today $300 million vehicles are investing in the function. And they are increasingly willing to pay for mid-level talent rather than junior executive.

This should, ultimately, help close the talent gap. If greater importance is attached to IR - which suggests increased compensation, greater chance of advancement, and a meaningful ongoing role with influence on strategy - more people within private equity firms will consider switching to it from other roles. There should also be more interest from other segments of financial services as private equity IR is recognized as an attractive career choice.

"The human resources pulled into IR will become more senior, more sophisticated, and more detail-oriented. You can't just have a glorified door opener," says Vincent Ng, a partner at Atlantic Pacific Capital. "The best IRs are charming, but more importantly value-adding. From a GP perspective, the partners don't have to travel all over the world updating LPs, because the IR knows enough to do the first three meetings alone. From an LP perspective, they just want people who know their stuff and respond to requests in a timely fashion."

In addition, there will be more touch points between GP and LP, so that the life of an IR executive is no longer one year harvest and three years fallow. It is not just engaging with existing LPs and courting new ones, providing feedback to the investment team, and organizing the AGM.

One of the reasons for PEP's adjustment of its IR strategy is the strong focus on co-investment. A select number of LPs have co-investment accounts and it is incumbent on the GP to ensure they have the best possible chance to match their portfolio needs with what is being generated at deal level. An additional associate is attached to each of these accounts, on top of the existing managing director coverage, to coordinate the integration. Even for smaller GPs, co-investment demand and secondary activity is creating more investor relations work.

"I've seen more secondaries and co-investment in the last five years than ever before and that is something I handle on a day-to-day basis," says Longreach's Herrell. "The co-investment process is a great tool for GPs and LPs to get to know each other better because they have to roll up their sleeves and work together. Coordinating that process and getting the right co-investors in - even if that's an outside co-investor who could potentially come into the next fund - that's a big role and it's important."

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• Topics
• Fundraising
• LPs
• GPs
• Advisory
• professional services
• placement
• Asia
• CDH Investments Management
• The Longreach Group Limited
• Affinity Equity Partners
• Baring Private Equity Asia