David Fisher is a Vice President at Phoenix American

David Fisher

Vice President

An effective investor relations team is an integral part of the back-office architecture of any investment fund issuing securities to investors. If your fund is planning to issue shares to retail investors, institutions or family offices, knowing how an outsourced investor relations provider works for you is critical to understanding how important this service is. When considering potential investor relations partners for your back-office, it is important not to overlook the potential for unnecessary expense, operational risk and reputational risk if you decide instead to employ in-house staff. A third-party investor relations provider represents efficiency, stability and professionalism in the eyes of investors, their financial advisors and others. At every stage in the life of a fund, an outsourced investor relations firm is a valuable operational partner.

Where Investor Relations Fits

The investor relations role begins with the onboarding of new investments in the fund. Investors purchase shares in the investment fund which enables your accumulation of portfolio assets. These purchases are often made directly with the fund sponsor or through financial advisors. Investments may arrive at the investor relations team in the form of paper subscription documents or via API connections or electronic subscription systems. In any case, investment data must be recorded in a uniform format in an investor relations database specialized to enable accurate allocations, facilitate investor administration, process payments of commissions and investor distributions and produce tax forms.

Traditionally, investor relations providers dealt only with paper subscription documents from investors, transcribing the data into the investor database. Today, it is not uncommon for investor relations providers to ingest new subscriptions electronically directly into their client’s investor database, saving time and money for the fund sponsor. An investor relations or transfer agent system must be integrated with an electronic subscription application or the client’s website for this to be possible. The provider records investment ownership and keeps track of who owns what through the life of the fund, pays distributions to investors and acts as a mediator in all securities transactions for the client sponsor. In this same capacity, investor relations serves as a liaison between the client fund sponsor and the investors. As the transfer agent of record, they are in charge of keeping proper records of all securities issued by the fund.

By interacting with investors, an investor relations partner is vital for a private fund. Investor relations, working with a capitalization table, allows fund managers to keep ongoing track of who their investors are and how much equity they own, which is essential for managing future rounds of investment. The availability of information on an investor web portal and data room, provided by investor relations, boosts investors’ confidence in the transparency of the fund. Existing investors, via a web portal, and potential investors, via a data room, should be able to review complete and accurate investment information on the funds they are investing in.

Challenges & Complexities

Knowing how many shares or what percentage of ownership each shareholder owns is the essential investor relations role. It is critical to an investment fund’s business but it can be difficult to determine. There are complexities in allocations that many managers have not considered. Many funds, for example, sell investments to new investors in units that are easier to sell because they are easier to understand than equity ownership. Later, other new investors may negotiate side letters or unusual provisions for their investments that change the allocation calculation for the previous investors, effectively converting units into equity. This generates a level of complexity in allocations that a professional outsourced investor relations provider is able to manage. Processing these calculations, producing investor statements and paying distributions based on the new allocations while effectively communicating this fund activity to investors is the sort of complex back-office role best left to a third-party investor relations/transfer agent partner.

The best approach when evaluating an investor relations partner for your fund is to look for the provider whose services avoid the most unnecessary expenditures and time. This will be the provider who has the best combination of three crucial characteristics.

  • Experience – Your best investor relations partner has a long history of experience with a variety of fund structures and asset classes including funds similar to your own. The firm should be registered with the SEC as a transfer agent and have an audit of its processes known as a SOC 1, Type II. This audit examines the controls in place for service providers including investor relations firms, involved in financial transactions and financial reporting.
  • Technology – A specialized investor relations or transfer agent system, able to house all your fund’s investor, advisor, transaction and historical data, should be in place. This should have live digital connections with all the relevant outside parties (wire houses, broker-dealers, custodians, etc) and be able to process back-office functions without operators having to export data or manipulate data outside the system. The investor relations system is ideally integrated with the fund accounting system and an investor web portal. An added bonus would be any system reporting capability that provides insight into the investor, sales and transaction history of your fund. There should also be integrations with electronic subscription platforms that facilitate new investment sales and industry data aggregators that can give your fund maximum visibility and the widest array of options in how you operate.
  • Customer Service – Your investor relations provider will be your back-office partner, your liaison with your investors. Their team should provide prompt, responsive and knowledgeable service. Neither you nor your investors should ever have to wait on hold for a relevant department, leave voicemails or wait hours or days for a response to an email. The service level of your investor relations team represents you and your brand in interacting with investors, their financial advisors and other participants. Consider the reputation of your fund when evaluating the service level of an investor relations firm.

The Range of Services Beyond Investor Relations

Investor relations systems and services can be integrated with other back-office capabilities and this can add a valuable level of efficiency and compliance. Fund accounting services, tax document processing, investor/advisor web portal solutions, financial and sales reporting, printing and mailing of statements and checks can be integrated with the investor relations function by some providers. When services are bundled with a single provider it reduces costs, enhances prompt performance, simplifies compliance and maximizes data security.

Private funds benefit greatly from the services of an outsourced investor relations partner. Fund management can offload a challenging and risk-laden set of non-core functions while gaining a comprehensive and accessible record of every aspect of the life of the fund. The ability to concentrate without distraction on sales and investments supported by the professional services of an outsourced investor relations firm is a competitive advantage for any manager of a private fund.