Navigating fund distribution in the digital age

At 5150 Digital Marketing Group, our focus is on helping emerging managers raise first, second, or firm transitioning funds using data-driven distribution strategies. Over the years, we have seen and experienced many things, but there seem to be common themes in some of the philosophical challenges managers face when thinking about raising capital. And, for fun, we thought we would share them with our network. We’ve compiled a few of those lessons with the goal of helping managers and their firms have a successful launch and fundraise.

1) In The Absence of AUM, Performance Doesn’t Matter

The business of alternative asset management can be boiled down to three functions:   

1) Raising capital (marketing),  

2) Investing capital (strategy execution), and  

3) Returning capital (administration/operations).  

By assigning a rating to each, investors can develop a quick formula to rate interest in a firm’s offering.  However, a quicker way to measure is by simply looking at a firm’s total AUM. AUM can provide a quick summary of a manager’s ability to attract investors, scale and execute investment strategies, and manage a firm’s operations. Without AUM, the firm will get a poor grade on marketing, a question mark on the ability to invest at scale, and uncertainty around the ability to create infrastructure capable of serving a larger LP base while stewarding greater sums of capital.   

Returns in the absence of AUM require fund managers/marketers to prove the ability to scale the firm’s average investment size without losing investment stage or market focus, or expertise where previous returns were generated.  Additionally, they must demonstrate the capacity to increase the number of fund investments without spreading a team too thin and diluting the team’s ability to drive value creation. 

Finally, while many fund managers believe a team’s historical performance is the only consideration when making a case for a new fund or manager, failing to make a case for their ability to attract investors, scale investments, and manage operations will lead to disappointing results.  While historical returns matter, we maintain the opinion that if they were delivered in the absence of respectable AUM, they will lead to more questions than commitment.  

OUR ADVICE – Focus on the story and who it is being presented with the awareness that the ability to attract capital may be the best way for investors to assess your firm.  Suffice to say, it may be the most important thing you do to ensure success.  

Create a written game plan with specifics on your most viable investors, why they would invest, and how you can identify them.  Detail your marketing plan, as well as the key activation strategies to make your fundraising effort a success. Fundraising execution reflects a firm’s experience, sophistication, and philosophy.   

By recognizing that operational and marketing alpha can be as important strategy execution, first- and second-time funds, as well as emerging managers, will have a much better received fundraising effort. 

2) Relationships Still Matter

All right, this one is a given, of course relationships matter. However, while most of the industry is moving from transactional to relationship-driven communications, there is still a common misperception that technology is a detriment to relationship development and management.   We disagree.  

Investor relations play a key role in the success or failure of asset managers. Strong relationships help build brand loyalty and foster investor advocacy, while inconsistent and impersonal communications are quick way to do the opposite. Today, with increasing investor expectations around transparency and personalization, marketing and communication technology is an absolute must, especially for small teams with limited resources. 

Case In Point: Recently, a $10b private equity manager explained the variance between funds the 20th percentile and 80th percentile was usually less than 1%. With the need to differentiate beyond performance, he realized their marketing differentiation could be defined by the relationships they built and maintained with LP’s, as well as allocators who declined previous investment opportunities.  After getting their first fund invested ($450mm), they made LP relationships a priority. 

They invested in a CRM to provide a 360⁰ view of clients, partners, and prospects, along with a marketing automation tool that allowed them to automate the delivery of highly personalized communications, at scale.  While there were likely many other factors that helped drive their AUM to $10b, the CEO gives the credit to upgrading to technology that allowed them emphasize, prioritize, and personalize investor engagement.  

OUR ADVICE – Be proactive and consistent in managing conversations and firm relationships. LPs and prospects won’t care about what you know, until they know that you care. Make a point to connect personally (one-on-one) with LPs on a quarterly basis.  Document interactions in the CRM so that everyone on the team can reference the insights from the most previous conversations. Learn their pain points, understand their expectations, help them make connections, and be a resource to them where you can. Personalized communications delivered consistently throughout the investor journey is simply the baseline of demonstrating how a firm treats existing and potential LPs. 

And, not surprisingly, many LP’s in a new firm or fund come from referrals from folks touched by fundraising initiatives. Remember, you can often benefit from the dreaded “NO” through introductions to investors which they feel might be a better fit.  Additionally, it is important to remember that today’s declining investor could be your biggest investor in the next fund. 

Investing in a CRM and marketing and communications technology to help personalize engagements will help deepen relationships with LPs, while creating advocates for  the firm. 

3) Do It Right The First Time

We see this often. A new fund manager has set up shop and is ready to raise capital.  In a rush to get things started, they deploy a commonly used, “friends and family first-guys who know guys next” fundraising strategy.  They craft a pitch deck, however the supporting diligence and marketing collateral are likely a work in progress, but nonetheless, they begin their fundraising efforts.  

Their first prospects approached usually come from their “most likely” investor list (comprised of friends, family, and best industry contacts). Unfortunately, testing any prospect waters with below average marketing collateral can turn capital requests into “you should (fill in the blank… change your deck, change your audience, change your pitch, change your strategy, etc.)” fundraising consultations.  

While these prospects want to help, they represent an audience segment that requires buy-in from investment experts or industry (sector) insiders. The mistake is not the “who,” as much as it is the “when” and the “how.”  Many managers blow through their best prospects because they don’t understand their audience, and sadly, with poorly conceived materials and a lack of proof from others, not only leads to disappointing results, but can also damage relationship and the long-term brand.    

This can be avoided by taking the time to do it right the first time.   However, the story doesn’t end there…

Part Two – Managing The Process:  Realizing they need help, they shift to the “guys who know guys” strategy.  With the hope of being introduced to “the right” investors, they engage connectors to make introductions for them. They trust the connector to reach out to their network and properly communicate the value proposition.  However, without a scripted story or professional collateral, these connectors struggle to articulate the story, leading to quick decisions to decline. 

Moreover, when the poorly conceived approach fails to align with its target, follow-up conversations and engagement becomes out of reach. Managers and their partners should strategize and sequence their process before initial conversations, so they fully understand how to deliver information that is pertinent to their potential investor. Sequencing investor engagement is key to ensuring that marketing efforts aren’t an exercise in futility. 

Anchors will invest first for reasons beyond ROI.  Tertiary benefits or increased economics will give them reason to being the first to invest. 

Influencers represent industry or investment expertise and can serve strategic advisors, advisory board members, or consultants to the manager. They require proof in the form of an anchor or investment momentum. 

Industry connections represent a firm’s friends and family professional networks, previous investors, etc.  While they can be influenced by anchors, most want proof from respected industry investors.   

Traditional fund investors are those that have expressed interest, won’t pull the trigger until they see momentum and commitments from industry connections.  This group is influenced by FOMO (fear of missing out). 

Top Off Investors are easy to identify, as they will share that if the fund reaches a certain level of commitments to come back to them.  They need to be communicated with early and often, but should be solicited last. 

OUR ADVICE – A properly sequenced outreach strategy, combined with professional collateral will lead to capital.  Conversely, poorly sequenced campaigns with below average collateral can send the wrong message to prospective LP’s and create long-term brand damage.   And, regardless of pedigree, a naive approach may negatively impact a manager’s perceived ability to build and manage an asset management firm. 

4) Invest in Your Marketing 

Over the years, we’ve had many managers who come to us for help with fund marketing and distribution but start the conversation with “We don’t pay for marketing and we don’t believe in retainers.” While these conversations don’t last long, they have always left us a bit perplexed. 

Typically, in these types of relationships, marketers and placement agents will use initial success fees as a credit against the retainer until all expenses are covered.  That means, on a typical 2/20 fund, it takes $5 million in new fund capital to cover $100,000 in expenses.   

So, if a fund manager is targeting a $300m fundraise but lack the belief that a marketer’s outcome will cover the expense to get there, they should not entertain the engagement.   The same holds true for the placement agent or marketer if they are negotiating with a manager who is uncomfortable investing in their own success. 

OUR ADVICE – Understand the expenses association with a fundraising campaign. Most legitimate placement agents and third-party marketers require retainers, but credit those retainers against future success fees. As stated above, the typical break-even is usually no more than $5-$7m, depending on the research and collateral required, as well as the reach and complexity of the campaign. 

While there are firms that don’t require retainers (typically in the hedge fund community), they tend to focus on more seasoned asset managers with solid historical performance records and a history of being attractive to investors. In these types of engagements, they don’t expect to have to spend a bunch of time, energy, or resources to make sure the manager, their marketing collateral, and their diligence files are market ready.   

With that in mind, especially with first or second-time funds, the synergy between the manager and the marketer is critical.  Engagements founded on mutual respect and trust allow engagements to become cohesive and collaborative partnerships, the kind that lead to successful outcomes. 

5) Avoid “Scorch and Burn”

Instead of doing their homework, many managers are still using the old “number’s game” marketing philosophy.  They send out generic messages to the masses with the hope of engaging viable prospects. The strategy typically involves purchasing a database of allocators and investors and then randomly blanketing these “new friends” with uninvited solicitations and unrequested sales and marketing collateral. Managers adopting “scorch and burn” strategies, often learn this lesson the hard way—generally after it is too late.  

Then, they reach out to the marketing community and seek help for them to go “back” to market. But be aware, most professional marketers will turn-down “scorched-earth” appeals like this, knowing the work required to re-establish the reputation and image of the manager is twice the work with half the success rates. This strategy can and will wreak havoc on the success of a campaign, creating significant challenges to overcome 

Blasting out uninvited solicitations rarely accomplishes anything positive.  What it does yield is brand damage, large “opt out” lists, annoyed recipients, and a reputation for not understanding, especially in the age of data-driven marketing technology, nobody wants to be sold. 

OUR ADVICE – Cold emails, even with personalization, have become increasingly ineffective, with open rates averaging less than a 3% across industries.  When those emails lack personalization, fail to recognize investor intent or investment fit, the open rate drops below 1%, confirming industry studies showing that in the absence of credibility and trust, investment opportunities are simply not pursued.  With that in mind, why would anyone ever solicit investments without first establishing credibility and earning the trust of the investor? 

We recommend emerging managers, as well as first- and second-time funds, to embrace technology to define the investor audience, sequence the approach, and use content-based marketing to build awareness and thought leader positioning.  Content built to inform (as opposed to content built to sell) allows managers to engage and influence investor with ideas, insights, and resources. If a manager is unwilling to do that, we recommend, at a minimum, that they should tap their network to obtain introductions and referrals before soliciting anyone. 

Especially for new fund launches, the marketing strategy and tactics of the manager become their brand.  Keep that in mind when considering the messaging process, the marketing material you send, who you send it to, and how it is delivered.

6) Do Your Homework

Many managers go with the first marketing team with a decent rolodex willing to take them to market. Interview questions, such as “how much money have you raised” and/or “who can you introduce us to right now that would consider investing” provide little relevance yet are commonly used to screen marketing firms.  By rephrasing to “how much money have you raised for similar sized managers?” or “what kind of investors would you target?” followed by, “how deep are your contacts with those types of investors?” can shed more light on a marketing firm’s track record and overall capabilities. 

Make sure your marketers conduct their own due diligence and develop a true conviction for the strategy. Confirm their knowledge of current trends and fund flows in the LP community, ask to see examples of previous marketing and communications strategies, and get a sense for where they have experienced success.   Be aware of the strengths and weaknesses of the firms you interview and do a broker check to make sure they are properly licensed and don’t have a bunch of violations in their history. Find out what kind of work they do on the front end of an engagement and what kind of deliverables a manager should expect from that work. Additionally, consider if they have current market relevance (recent familiarity with the targeted audience of the offering).  For further insights, Kelly DePonte at Probitas Partners  wrote a great piece on selecting and engaging placement agents. 

OUR ADVICE – Take your time and get to know the allocators and what they bring to the table. Some are adept marketers, while others are sales specialists in a particular strategy. Some teams will be more effective at getting first meetings, and others will be more effective in the closings. Do your own diligence, make sure the firm you engage is a good fit with your team, investment sweet spot, and target audience. Taking the time to understand their process, strategies, and tactics.   

Finally, find a firm that has marketed to a similar audience of LPs, as well as had experience working with similar sized firms and fundraising mandates. 

7) Your Marketer Is Not Your Enemy

“Wait, we are on the same team with the same goal!” Remember, both you and your marketing partner are incentivized to raise capital … nobody wins if capital is not raised. Before you engage them, let them earn your trust.  Interview them…have them lay out and explain their strategy so you understand what they are proposing to do, why they do it that way, as well as the outcome they anticipate.  The working relationship between the manager and the marketer MUST be collaborative, requiring mutual respect and trust.  Suffice to say, if you don’t trust them, don’t hire them.  

While the above sounds obvious, we have seen (and experienced) unhealthy dynamics destroy the relationship between internal teams and their marketing partners.  The dynamics usually stem from a manager trying to motivate internal and external efforts through financial incentives that ultimately pit the sides against each other.  

While the manager thinks the competition will keep both sides motivated, what it actually does is destroy any chance for collaboration. 

Healthy relationships between the parties allow for the sharing of market intel acquired throughout the fundraising process, such as what is working, what isn’t, who has expressed interest, what features were most important, etc. 

OUR ADVICE – Encourage collaboration and support among your marketing teams. Competitive, non-collaborative approaches have a perfect track record… they never, ever work. A culture of mutual respect, common visions, and a collaborative process, however, can lead to extraordinary results. You have made the investment in the marketer, make sure the spirit of the relationship is protected every step of the way, so you have the best chance at success.

8) Timelines – Nothing Happens In Three Months

According to Pitchbook, the average time for new funds raising capital has eclipsed 18 months.  Here is how it generally breaks out:  Market preparation (strategy research and manager diligence), is conducted, allowing a manager or marketing partner to develop the story, position the strategy, and build an effective distribution plan. This five-to-eight-week process is required for investor selection and collateral development. 

Following the pre-market process, developing the marketing collateral, and messaging strategies is a collaborative process that can take an additional 4-6 weeks or longer, depending on the needs and complexity of the offering. Especially in the case of complex offerings or first-time managers, it isn’t unusual to be 8-12 weeks into an engagement before the first “official” sales call is made.  And that’s just the beginning of the process.   

From there, you transition to the investor’s timeline, which typically requires anywhere from 4-6 touch points just to get approved in the initial screening process.  Once approved for consideration the diligence begins, where a manager should anticipate another one to four months, depending on size of the investor’s team and their diligence process.  

While setting deadlines will keep the tire-kickers from dragging the process out, managers and marketers must give prospective investors adequate time to take it through their process.  

OUR ADVICE – Be patient.  Based on Pitchbook’s latest fundraising research, the average time from launch to close for a new fund offering is getting longer and longer.  Take the time to understand market trends and fund flows before defining your audience, positioning your strategy, creating your marketing collateral, producing supportive content, and building  your diligence documentation.   

Once complete, you are ready to confidently (yet patiently) go to market.  Targeted investors will need to be aware of your firm, hear your story, investigate the opportunity, meet your team, conduct diligence, and finally, and present the offering to an investment committee.  A study by Affiliated Managers Group found the process requires, on average, anywhere from 12-16 touch points to secure new capital. 

Expecting investors to react and respond quicker than the norm can make a manager look naive, impatient, or even worse… desperate. Further, unrealistic expectations of the manager indicate a lack of understanding of the process, which will create unnecessary and divisive friction with marketers and investors, impeding the chances of successful fundraising.

9) Don’t Dictate the Process

However, once the engagement begins, the manager begins to micro-manage the fundraising process.  When presented with the campaign strategy, they begin to dictate who to target, how best to communicate, engage, and influence them, undermining the fundraising process of the marketer. While the manager’s intentions are good, their efforts send a “lack of confidence” message to everyone involved in the process, while undermining the collaboration between the parties.    

So, the manager has come to the realization that their internal marketing and distribution strategy isn’t working, and, thus, are going to engage a third-party to help them with the process. So, they interview a number or placement agents and eventually decide on one based on their familiarity with the strategy and their history of fundraising success. 

OUR ADVICE – Trust the marketer’s expertise and instincts, the ones that made you hire them in the first place.  Give them the ability to accomplish their objectives without undermining their trust or confidence along the way. You’ve hired them for their expertise and capabilities…don’t compromise it by micromanaging the process. 

Seasoned marketers are likely in the market with relative frequency, have many strategic relationships, understand the needs of targeted investors and know how allocators want to be engaged, and have specific strategies and tactics to influence your audience. If you try to dictate their sales and marketing process, you will likely diminish their ability to perform at their peak efficiency. Get the most of your investment and allow them to do their job. 

10) Investors Invest In Managers, Not Marketers

Don’t get us wrong, while fund strategy and diligence details are vital to the fundraising process, they take a back seat to the relationship between the investor and the managers. Regardless of the opinion of those still relying on transactional conversations and impersonal communications, investing remains a people-driven business. Investors bet on people they find likable, credible, and trustworthy.  While exceptions can be made for the likability, they are never made based on a manager’s credibility or trustworthiness.   

Aside from the performance attributes of a strategy, fund investors and allocators look for managers with strategies, values, and beliefs that align with their own. No matter how good your marketer is, it’s the manager who must earn the confidence of the investor. While the marketer can help, the manager plays a key role in closing the transaction. 

OUR ADVICE – Once the stage has been set, it’s time to introduce the manager.  At this point, the closing responsibility is solely on the manager, who must connect, validate their credibility, and demonstrate their trustworthiness.  

While the marketer has likely made a case for these attributes throughout the process, the actions of the manager must authenticate them.  

Prospective investors will look to see how transparent and responsive the manager is in the diligence process, as well as try and assess how the existing LP base is viewed and treated.  Staying responsive and patient throughout is critical, as it provides an opportunity to earn the investors trust. The manager will play THE key role in getting the commitment across the finish line.

11) Don’t Skimp on Your Diligence Documentation

The days of “take my word for it” ended with Bernie Madoff. Do not ask or expect an investor or allocator to skip over or speed up any aspect of their due-diligence process. Doing so will raise red flags, leading the marketer to believe something is being hidden.  

When managers skimp on their diligence materials, the timeline for investigation increases and the depth of their inquiries deepen.  In an effort to get comfortable, the investor will now have to dig deeper into the background of the manager, the team, and the historical performance of the pm.  

Simply put, managers that don’t assemble, organize, package, and present detailed diligence files will have a hard time earning the trust of the investor.  Without the trust of the investor, there is nothing to talk about. 

OUR ADVICE – Ensure that your diligence package provides an in-depth view of the firm, the manager, the market focus, the history of the partners, and the historical performance. This should include the completion of a standardized industry DDQ as well as a well-organized data room. These are not unique offerings by marketers, they are the minimum requirements to earn the respect and trust of the investor community.

12) Investors Come In All Shapes And Sizes

Investors, allocators, family offices……they come in all shapes and sizes.  With wide-ranging investment interests, unique screening processes, and diverse return expectations. Using a singular approach to connect with a diverse group of investors simply doesn’t work. The days of transactional marketing and impersonal communications are behind us, forcing marketers to define prospect audiences with granular details in an effort to engage and influence throughout the investor experience. 

The growing expectations of digitally savvy consumers have put a premium on the investor experience, requiring managers to deliver hyper-personalized, on-demand content, and multi-channel engagement. Today data-driven technology is allowing marketers to increase the effectiveness of marketing and communications, improving what fund advisors have done for years… only doing it cheaper, better, and faster. Using a combination of data insights, behavioral analytics, and marketing automation, marketers are able to connect with prospects through the use of personalized communications. 

OUR ADVICE – Define and research your audience. A good marketing outreach strategy will: be highly personalized, recognize the intent and pain points of the audience, and be customized based on the profile of the targeted investor. 

With that said, managers and marketers need to be prepared for changing personalities and challenging nuances that come with different types of communities and people. Be patient and prepared to deliver whatever is requested.