Investor relations is one of the most crucial and demanding functions of a growing fund and it is also commonly where many small-to-medium sized managers fail to meet investors’ evolving standards. All fund managers know that investors are the life blood of the business unless you are managing your own money at which point you really would not need to have a fund. But to build any business – fund or even just a tech company – a business needs to have a structured sales and marketing process at the forefront and not as an afterthought. When any business makes it an afterthought (investment fund or not), it shows in their revenue growth or to put it bluntly lack thereof.

Historical Alternatives to ‘figuring out’ IR

What the majority of fund managers grappling with this fateful question – in particular those sub-$1Bn – is to consider, as is commonly done, these four options to figure out how to manage their IR function:

1. Passing the responsibility to the CIO and/or COO
2. Using a third-party marketer or placement agent
3. Hiring someone junior or mid-level (note: typically done due to reduce cost to hire)
4. Doing nothing at all

While 1 and 2 could work as a temporary solution (i.e. 6-18 months or less), it is not what a fund manager should do if they are really looking to aggressively grow the business because you get hit with the ‘tried and true’ issue of bandwidth restrictions and interest alignment. As is commonly known, when bandwidth diminishes so does quality and as a direct consequence — results. Your CIO and/or COO’s main focus should be the management and operations of the business and the portfolio (read: the development of the product and operations should be their only focus). In adding the IR function onto their plate, a fund can save money in the short-term, but greatly suffers long-term. Most managers end up spending reduced amount of time growing their business and more time or just managing or even worst surviving. Placement agents work as another alternative, but countless funds we’ve spoken to especially those sub-$1Bn have reported it to be ‘not as effective as they would have liked especially given the cost incurred’ and in most cases paying handsomely for a relationship you are also like them working hard to manage post-allocation. This was the common sentiment across funds regardless of geography. 

In an environment where there are tens of thousands of funds competing for capital globally, investor relations should be the last function to take a backseat.

Why? In any business, sales and marketing not just product development and operational management are what keeps a business moving in the right direction. 

Moving onto #3 – it can be an ideal solution for business owners who hold the school of thought of ‘hire cheap and train hard’. However, in our industry where millions and billions of dollars, euros, francs, pounds, yen, dirham – or whatever local currency you are targeting may be – are exchanging hands per deal that may not be the most desirable course of action from the perspective of the allocator. What having a less than experienced professional can quickly illustrate is a lack of care on your part in what is a sensitive process (remember: large sums of money are exchanging hands) and a blank checkbox in going through the due diligence process.

One of the common areas of complaints that investors have in regard to fund managers is around relationship management and understanding that they are your partner not your ATM. Sometimes in thinking of the description ‘limited partner‘, the term ‘limited‘ is felt more than ‘partner‘. In having a less than experienced professional at the helm, you will not only send the wrong message to the target audience you are looking to attract, but it could hurt your team’s ability to close new accounts, and in some situations, retain current ones. Remember investor relations does not stop, it is ongoing even when you are not actively looking to raise capital.

If you are doing #4, then to be honest you just are really not in the mindset yet of building a business. You are likely in the very early stages and may have a passion for investing, but managing a business is just something that you may not be looking to do. If this is where you are, it would probably be cheaper (and much less stressful!) just to invest your own capital before taking on the fiduciary duty of doing it with someone else’s.

Investor Relations is the lifeblood of an investment fund

To be able to run a fund business successfully, one must have a fundamental understanding that this is a people’s business. When you are dealing with people, it is imperative to take a serious look and ask yourself – am I the type of fund that investors not only want to do business with, but would want to refer more business to our firm. Now, there exists a fifth option for fund managers, a new and growing trend today – outsourced investor relations.

Historically, outsourcing IR has been commonplace among publicly-traded companies for decades, but given the rising levels of requirements and expectations placed on fund managers by investors handling this particular function becomes daunting, yet it must be handled with care, finesse and the appropriate level of expertise. Outsourcing IR when done properly does not mean outsourcing your relationships, it means uncovering a cost-effective way to enhance your relationships with current and prospective LPs; build a stronger pipeline of qualified investors; it allows you to better translate your firm’s value in addition to drastically improving your sales efforts thus leading to more deals closed. In short, outsourced IR will allow you to successfully and profitability accelerate the growth of your business.

So who is it for?

Outsourcing IR works well as a solution for managers that already have a CEO and COO and are now looking to catalyze their firm’s growth by expanding their team’s bandwidth, while maintaining a high level of quality control. It can also work well for those just starting off or are just starting to raise capital and want to ensure their marketing capabilities are robust and sophisticated to appropriately match and/or excel past their competition. 

Outsourcing IR, similar to the ability to outsource so many other functions, brings considerable strength to a business’ growth prospects because it allows the internal senior professionals to maintain high quality of standards while simultaneously increasing their bandwidth to a function that many times ends up falling through the cracks.

What not having a developed IR function could mean for your business?

An underdeveloped investor relations function is a signifier that a fund is not truly ready to grow aggressively and is not taking the necessary requirements and precautions to profitability grow the business. Instead many funds that have not dedicated an appropriate level of time, resources and requisite expertise to this function see significantly slower sales cycles and decreased top-line growth.

Why? This is because the relationship between LP and GP are necessary to the success of a fund and when it is ignored, fund managers risk losing potential investment to the competition. As the fundraising environment matures, investors’ demands will only continue to grow and allocators can quickly tell when a fund is investing in its future or just trying to manage in its present.

What do allocators look for in Fund Managers?

Investors want a solid track record, but that is not the only thing they are looking at in making a final decision to allocate. Investors want to allocate into funds they trust and if a manager has not dedicated significant time, effort and resources to consider their relationship and by extension their fiduciary responsibility to maintain that relationship then how can a manager build long-term trust and as a consequence how can a manager grow or get recommended?