The Value of an Excellent Investor Relations Function

In the world of fundraising, when a firm is looking to go to market they normally leverage their internal IR team and/or networks of senior partners or they use a placement agent.

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A placement agent is an intermediary who raises capital for investment funds. Placement agents have played a very important role historically when firms have been looking to fundraise.

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The main role of the placement agent is to raise capital quickly and efficiently, which they achieve by introducing the fund managers to qualified investors. The better placement agents understand the investing firm's strategy and fundraising needs to the point where they can match them up with similar minded LP’s in a quick fashion.

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Additionally placement agents can be extremely beneficial for attracting new investors, firms looking to increase their global network and/or introducing a new investment strategy.

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However, placement agents can provide other services as well, including marketing, helping with strategy, organizing meetings and roadshows, and occasionally negotiating on behalf of investment firm.

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So how do these placement agents get compensated?

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There are a few ways for the placement agent to get compensated, and each investment firm and agent will have a written agreement outlining the terms. Traditionally, however, most of the compensation would be directly tied to the amount of money the placement agent would raise for the investment firm.

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Traditionally that would be 1-5%, and most of the time between 2-3%, of new money raised for the fund. More specifically, the successful placement of the fund with the investors introduced by the agent.

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Occasionally, other compensation types can and will be used, a retainer, cancellation fee, and/or bonus for exceeding capital targets, and this is much more likely if the placement agent is being utilized for additional services.

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However, just using the percentage of new money raised, using an example of a 100 million dollar fund, that would be 2-3 million in fees as a baseline.

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A good amount of funds are raising much more than 100 million dollars. And while they could be using multiple placement agents, those fees will add up…

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One of the main reasons why IR has become such a more active and important function to an investment firm, as a whole, is to help with fundraising and maintaining client relationships.

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As fundraising becomes more of a permanent and ongoing process, an internal IR function can help with developing deeper relationships with current investors, targeting like-minded prospective investors, continual financial reporting, annual/investor meetings, as well marketing materials. All of which become sort of a pre-marketing for the next fund raise which if recent trends keep up, will be on a more near term timeline...

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Cost of an internal IR function also plays a role here. Let’s say a firm has raised a 500 million dollar fund. The firm has a three person IR team consisting of an MD, VP and associate. Salary, bonus, benefits and potentially carry considerations for the three person team versus a baseline of 10-15 million dollars in fees from a placement agent.

Obviously there is a lot more nuance to this comparison, however it’s still a decision each firm has to make for their own. And a lot of firms will utilize both resources. But it really puts into perspective how cost efficient an excellent internal IR function can be.

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For those in IR roles or firms aiming to expand their IR teams, we're always open to conversations and collaborations. Reach out anytime!

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