Re-thinking investor and prospect engagement in the age of digital distribution

While there are many hurdles asset managers face when launching a new firm, nothing will trump the challenge of raising fund dedicated capital for a first-time fund. Over the last 20 years we have helped large and small asset managers solve marketing and distribution challenges, learning many lessons along the way. In this edition Oversubscribed we explore the importance of channel-specific fundraising strategies for first-time funds.

Cold marketing collateral may not be as helpful as you may think.

In any environment, raising fund dedicated capital can be a difficult undertaking. For emerging or spin-out managers with first or second-time vehicles, it can be exasperating. Success requires a manager to stand out, making their initial marketing and communication efforts as important, if not more, than the investment performance of the strategy.

Introduction 

You are on your way. After 14 years with a large private equity shot, you and your team has made the decision to spin out and set up your own shop.  Awesome. Legal counsel wrote the PPM and subscription agreement, you set up the fund with an administration firm, leased office space, bought the furniture, hung the art, and recruited admin support.

Now you’re ready to get the word out and start “soft-circling” investors for your inaugural fund. You’ve never raised capital but have heard others talk about how hard it is. But they aren’t you and your team…. You are ROCKSTARS! Pitch deck in-hand, you are your partners are ready. Seriously, great returns, amazing network, repeatable edge… how hard can it possibly be? First stop, personal networks, previous investors, industry mentors, friends, and family. If only we had a dime for every time we have heard that story.

The Truth

Sadly, most fundraising initiatives for first-time funds fail. And, at least from our vantage point, can usually be attributed to poorly conceived marketing and fundraising strategies. First, they blow through previous investors, industry contacts, friends, and family with poorly half-baked marketing collateral. Then, they purchase an industry database and start reaching out to cold leads. While their story opens doors, their discussions are transactional, rather than conversational, with managers asking for the order before credibility has been established and trust earned.

This is just one example of the mistakes we see managers make when they don’t have a seasoned marketer on their team. Getting transactional too early is a common mistake of managers, but one that seasoned marketers rarely make.

Factor the Fundraising Campaign into the Fund Lift-Off Budget 

You hired a great executive assistant, hung your finest artwork, and built an office that oozes success… don’t skimp on investing the time and energy into building a well-thought marketing campaign. A manager willing to invest in the long-term growth of firm AUM sends the right message and creates the right perception of the firm, boosting long-term credibility in the LP community.

When managers lack an internal marketer and choose not to outsource marketing, communications, and fundraising functions, they commonly end up making unnecessary mistakes that impede fundraising initiatives. Unfortunately, these mistakes can make a manager look unprepared, unrealistic, and unprofessional, while leaving an impression on investors that must be overcome in the future.

Find the right partner, a better way, and look out for the wrong ones

By only considering “non-retained” firms, the manager is expecting a marketer to make an exclusive investment in the due diligence and collateral development aspects of the campaign or is just skipping over those aspects altogether. This kind of relationship narrows the playing field to folks with small, resource-challenged teams that may not have the expertise required to complete the front-end work of a successful campaign. The existence of a retainer simply represents an alignment of interests, no different than the one demanded today between the GP and their LPs. 

While it happens more frequently in the hedge fund world, there are still some agents that are willing to take on a project with compensation linked solely to the outcome of a successful fundraising campaign. However, these types of marketing firms rarely dedicate their undivided focus to preparing the kind of due diligence, marketing development, and strategy positioning resources that are critical to the success of an emerging manager. Most often, these are not process-driven firms committed to the long-term success of the fund or manager. This type of marketer generally has a “go-to” group of investors who have shown interest in similar strategies. They are usually short-term focused, seeking an opportunity to simply make introductions between allocators and fund managers, without requiring manager diligence or the build-out of quality marketing material. While these kinds of relationships can be effective, they are usually set up as “non-exclusive” engagements and include a “carved-out” group of potential investors to target. We believe the days of “throw it at the wall and see what sticks” marketing ended with Bernie Madoff.  

Unfortunately, these kinds of relationships often seem promising at the beginning, but they end up compromising the time and focus of the firm while creating the wrong first impressions among LPs. If there is no immediate traction in the discussions, these types of arrangements usually end in disappointment for both parties. The manager walks away with nothing to show for the effort, a negative view of marketers, and increased pressure from a rapidly evaporating fundraising timeline.   

Overcoming the reputational damage inflicted by a less-than-thoughtful marketing effort is easier said than done. Once potential investors form an opinion of an opportunity, it can be extraordinarily difficult to get them to change their minds. Following the termination of a marketing engagement over non-performance, fund managers will attempt to re-enter the market via another marketer or on their own accord. Unfortunately, a manager’s enthusiasm will be quickly dashed when targeted investors indicate that they have already reviewed and declined the opportunity. The only way a manager might get in the door a second time is if they have a close connection with the investor. 

Retainer or Success Fee-Only Marketers

More often than not, the retainer of a third-party marketer is credited against future success fees to allow the marketer to dedicate the time and resources needed to complete the initial work on a successful campaign. With a credit balance against success fees, the real expense of a retainer is a short-lived event, assuming the marketer can actually raise the capital. The amount of LP capital required to offset the retainer is typically minimal; usually far less than $10 mm. If either side has doubts on their ability to raise enough capital to get past the break-even point of the relationship, they should probably be taking a hard look at their respective business plans and the probability of any success in working together. 

You’re Presenting to Professionals, Don’t Sell Like an Amateur 

Accredited investors see presentations weekly, so they know when a manager is operating without a well-rehearsed, well-thought distribution strategy. In many cases, investors are left wondering if the manager will run their fund strategy as poorly as they conduct their fundraising campaign. However, for the manager of a first or second-time fund, investing in a well-thought distribution plan can prove to be the smartest investment a young firm can make. It allows the team to focus on strategy execution while presenting investors with tailor-made marketing and communications capable of reflecting their true edge in the strategy.

Our Advice 

If you hire an internal marketer, they will require a base salary + upside. Expect to pay a seasoned internal marketer somewhere between $250,000-$1,000,000 annually. You can expect something similar from a placement agent. While retainers vary, most reputable firms charge between $25,000 -$250,000 annually (some are required up front, while others charge monthly). As it relates to success fees, they are generally about 50 basis points of the first-year management fee, payable quarterly over 1-2 years. 

The expense of a retainer lost to an unsuccessful marketer can be overcome but repairing damaged reputations with LPs can be a very cumbersome, uphill process. Do your homework and always check references. Finding a process-driven team that will dedicate the energy and expertise necessary to prepare your firm to go to market may require more work and expense up front. Consider that the real expense lies not in the lost retainer fee, but in lost “time to market” and the reputational damage with investors in the target market. However, marketers should end up serving your firm as an outsourced partner committed to helping you achieve your AUM goals, allowing you to remain focused on achieving your ROI goals.