The evolution of investor relations

The 2015 annual Stevenson James Investor Relations and Fundraising survey, which canvassed the opinions of LPs representing £300bn of assets under management allocated to private equity, has revealed some interesting and fast-moving trends surrounding the development of the investor relations (IR) role. Participants in the survey included funds-of-funds, institutional investors, family offices, as well as public and private pension plans throughout Europe and the US.

Given recent industry developments, it is not difficult to see why LPs are demanding more from the IR function. While IR heads will continue to be the GP's key representative when dealing with LPs, the ever-growing demand for co-investment deals; the onset of onerous regulations, including the Alternative Investment Fund Managers Directive; as well as new rules that prohibit certain groups from investing into private equity – meaning GPs need to look further afield for investors – all add up to increase pressure on the IR function.

One of the most interesting findings was 86% of LPs preferred IR professionals to have investment experience, and 64% would rather they have professional qualifications. This has increased from 56% and 31%, respectively, in last year's survey. Furthermore, 50% of this year's respondents believe IR individuals should have a seat on the investor committee, up from 44% last year. This increased preference for strong technical experience is a nod towards a growing number of investment professionals looking at IR as a career. "It's all about finding the right person, someone who has the knowledge, experience and skills to do the job effectively but who also has the right personality to engage with LPs," explains Josephine Defty, director at Stevenson James.

As demand for co-investment continues unabated and GPs more actively manage the transfer of fund stakes, 78% of those surveyed said managing these activities was an important or integral part of the IR role.

Carry on raising
Interestingly, all of the survey's respondents believe IR professionals should receive carry as part of their compensation package; with 25% preferring a base salary, discretionary bonus and carry; and 75% wanting base salary, commission linked to commitments made and carry.

Given the increasing pressure placed on investor relations, it is notable that 46% of LPs believe the function to be only adequately resourced and could be improved, a decrease on last year's 50%. While 90% of respondents believe the IR role will continue to develop, only 25% felt GPs were in a position to meet this growing pressure. According to Defty, the important point here is not simply hiring the most qualified IR professional, "but that the GP fully recognises the importance of the IR professional within the firm and sees them as integral to the firm's growth and success".

Furthermore, more than 75% of respondents stated there was a marked difference in service levels between GPs. This draws on a growing theme of standardising the IR function throughout the industry. All survey respondents said it would be helpful if reporting was standardised, with a further 84.6% wanting a standardised structure and delivery of portfolio updates and 76.9% demanding a standardised structure and delivery in regards to team changes.

Despite two strong years for private equity divestments, leading to record levels of distributions to LPs – resulting in plenty of available cash to be re-invested in the industry – LPs will seemingly no longer suffer poor investor relations. According to the survey, 60% of respondents assess a GP's IR offering alongside other factors when deciding whether to re-up.

The new demands of LPs on the IR function is a clear reflection of the growing sophistication of investors on top of increased demand for transparency. Furthermore, as the outlook in Europe remains uncertain, investors are exercising more caution over investment decisions; thereby needing more detailed and regular information updates, as well as deeper fund due diligence.

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