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Navigating fund distribution in the digital age
At 5150 DMG, our focus is on helping emerging asset 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 seems 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 to help promising funds have a successful launch.
1) AUM is as Critical, if not More Critical Than Performance
A number of people believe that performance should speak louder than AUM. And on some level we agree. Surely, it would be nice if the performance and devotion of a team mattered more than their AUM. But unfortunately, this world doesn’t work that way. Nothing is more important to the credibility of a new team launching a first or second-time fund than getting to a respectable AUM. Young firms can survive average performance with a respectable level of AUM, but struggle to survive without a credible level of AUM, even with superior performance.
Our Advice – Be sure to focus on what may be the most important aspect of your firm: the capital raise. Build a written game plan with specifics on who is your most viable investor, how you plan on getting to market, and the key activation strategies to make your fundraising effort a success. Your AUM has made your strategy tried and true… share this with new investors! While it is easy to get sidetracked with running the business, the long-term implications of an inconsistent fundraising/JR-PR strategy can often mean the difference for capturing new investor’s attention.
2) Relationships Matter
All right, this one is a given, of course relationships matter. Simply put, we are all in the people business.
Consider this: A $10 billion fund manager once explained to us that the performance variance between the 25th percentile and 75th percentile performers in their sector was usually less than 1%. Recognizing the need to differentiate beyond performance, the manager realized early on that the real difference could be defined by the relationships they built and maintained with current LP’s, as well as those allocators who may have declined previous fund investment opportunities.
Our Advice – Be active in managing your existing relationships. What we have experienced is that many LPs really don’t care what you know, until they know that you care. This can be demonstrated in many, many different ways and it is important that your communication’s strategy always be personalized and consistent. Investing the time and energy in personal communications with your LP community will help you communicate that you care and can make the difference between two firms with similar track records and investment focus. And, not surprisingly, many LP’s in a new firm or fund come from referrals from folks touched by fundraising initiatives. Remember, that you can benefit from the dreaded “NO.” Depending on how it is handled, it can lead to interesting referrals down the road.
3) Do it Right the First Time
We see this often. A new fund manager builds their own marketing collateral, diligence material, and messaging strategies and attempt to take their strategy to market. Often utilizing a combination of their own industry contacts and a list of “guys who know guys,” they find that the “guys who know guys” strategies rarely succeed. This, paired with poorly conceived collateral can tarnish a brand by sending a message to LP’s that your firm really doesn’t understand the fundraising process.
With a poorly conceived pitch deck and a series of early-stage meetings with “potential” investors, these managers come across as complete rookies. This reputation will also inform their perceived ability to manage capital—which is sad, because most of these managers have significant strategy management expertise. Typically, these managers will be forced to undergo the process of “presentation improvement,” rather than a focus on GP or LP capital raising. And inevitably, after 7-8 months of brand management, the result gives a solid presentation of answers to the most asked questions, but the manager has burned through their best contacts.
Our Advice – Consider your brand and strategy before you go to market. At a minimum, build an advisory team that can serve as a reliable pre-market sounding board, and work closely with them to develop high-quality marketing collateral. On top of that, invest in a “clean” database of relevant investors, so you won’t be guessing at who in the LP community will likely have an interest in hearing your story. Perfect your pitch in front of your advisory board until you have the delivery and timing down to a science. Anticipate your objections and be prepared to patiently answer them.
4) Invest in Your Marketing
We’ve met managers who say straight away, “We don’t pay retainers.” But when a manager expects the placement agent to invest more time and resources in a successful outcome than they are willing to invest themselves…well, it’s a recipe for failure. If a manager comes to us unwilling to invest in a successful outcome yet wants the marketer to fund the expense of a well-thought fundraising campaign, it represents a very obvious and irrational disconnect. From our perspective, this is a non-starter.
Our Advice – Be open to paying a retainer, if you want to engage a committed third-party marketer. Most legitimate marketers have retainers, but credit those retainers against future success fees. The typical break-even is usually no more than $5-$7 mm in committed capital.
We have come across many firms that don’t require retainers, but without a retainer, you won’t get the investment of time, energy or resources required to make sure the manager is properly positioned going to market—nor will they counsel early-stage managers on the best and most effective way to get to market. Finally, the few successful firms that do not require retainers tend to focus on more seasoned asset managers with solid historical performance records along with a history of being attractive to investors.
With first- or second-time funds, the synergy between the manager and the marketer is critical. It will lend itself to a more collaborative and cohesive relationship between the parties, with both having a similar sense of urgency to succeed. This is most effectively accomplished with retainer fees and credits.
5) Avoid the “Scorch and Burn” Strategy
Instead of engaging a professional, many managers purchase a database of investors and randomly blanket these “new friends” with unsolicited sales material and marketing collateral. Without a personal introduction or invitation, they just begin to pepper a potential investors’ inbox, voicemail, and reception desk with information on their offering. Rarely does this strategy yield anything except angry recipients.
Our Advice – Be considerate about the marketing material you send. It’s time to put the shotgun back in the closet and get a rifle. Utilize your networks to get favorable introductions to these investors, or respectfully ask someone on their team what their protocol is for looking at new opportunities. Managers who have adopted “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 reputational damage.
6) Do Your Homework
Many managers go for the first marketing team with a strong rolodex willing to take them to market. However, make sure your marketers conduct their own due diligence and develop a true conviction for your strategy. It’s essential that you seek solutions that include understanding current trends in the LP community, a definitive marketing and communications strategy, and a track record that you can stand behind. Be aware of the strengths and weaknesses of every firm you speak with, prior to reaching out, and determine whether they are licensed representatives, operating out of a reputable broker-dealer. 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).
Our Advice – Take your time and get to know the allocators and what they bring to the table. Some are adept marketers, while some are simply sales machines with strategy preferences. Some teams will be more effective at getting first meetings, and others will be more effective in the closings. Do your own diligence, chances are the firm you are speaking with will have an investment sweet spot, better relationships in certain markets, etc. Find the firm that best fits your mandate.
7) Your Marketer is not Your Enemy
Hey, we are on the same team with the same goal! Remember, your marketer is incentivized to raise capital, and nobody wins if capital is not raised. Hire them for their expertise and then trust it. The working relationship between the manager and the marketer MUST be collaborative. Many internal sales team actually view or treat marketing partners as if they are competition… or worse yet, the enemy. This mindset does not allow for collaboration on strategy— on the things that are working (or not working) or most importantly on the commonality of investor networks.
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) Have Realistic Timelines – Nothing Happens in Three Months
If a marketing team is going to properly represent a manager to investors, they should conduct their own due-diligence and market research to build a depth of knowledge that will allow them to internalize the story and confidently defend a manager and their strategy. This process will take anywhere from 3 to 6 weeks. Following this process, providing the manager with consistent messaging and marketing collateral is a collaborative process that can take an additional 2-3 weeks. So, it would not be unreasonable to be 8-9 (or more) weeks into the engagement before the first “official” sales call is made.
Our Advice – Prepare properly for your fundraising effort. Give yourself the proper time to go to market, allowing interested investors to meet you, hear your story, investigate the opportunity, conduct due diligence, and run the strategy past their investment committee. It will likely require 4-6 touch points just to get them to consider your strategy and, if you are lucky enough for them to enter into a diligence effort, prepare to give them another 4-6 weeks to do their homework.
Expecting investors to react and respond quicker than the norm can make a manager look naive, impatient, and even desperate. Further, the unrealistic expectations of the manager indicate a lack of understanding of the process, which leads most marketers to the conclusion that the manager doesn’t know what they are doing, doesn’t understand the process, or just has unrealistic expectations of the manager/marketer relationship. None of which help with a successful fundraise.
9) If You’ve Struggled to Raise Capital, Don’t Dictate the Process
So, the manager has realized that their distribution strategy isn’t working, and, thus, have engaged a marketer to help them in the process. However, the manager is not willing to listen to advice on how to be more effective or efficient in the marketplace. This leads to a monumental waste of time and energy. If a team is struggling to raise capital but unwilling to take responsibility for the results, or lack thereof, the only result will be of more frustration.
Our Advice – Trust your marketer’s instincts that made you hire them and allow them to do their job. You’ve done your homework and have hired them for their capabilities to help you go to market. They are likely in the market with relative frequency, know how investors want to be approached, and have specific messaging strategies for your audience. If you try to dictate the sales and marketing effort, you will likely limit their ability to perform at their peak efficiency. Get the most of your investment and allow them to do their job.
10) Investors are Ultimately Investing in the Manager
Don’t get us wrong, the fund strategy and details are vital to the fundraising process. But remember when we said this is a people business? Investors want to support managers they trust, whose values and beliefs 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 – Identify and invest in your values as a manager. We recommend that you stay closely involved in the process once an investor starts the diligence process because the investor will likely watch how responsive and attentive you are, trying to assess how you will treat your LP base. Stay involved and patient and always remember, the investor is putting their trust behind you, not the marketer. The manager will play THE key role in getting the commitment across the finish line.
11) Don’t Skimp on Due Diligence
The days of “take my word for it” ended with Bernie Madoff. Do not ask or expect a marketer or an investor to skip over any aspect of the due-diligence process. This is alarming and will lead a marketer to believe the manager is hiding something. When the manager skimps on due diligence, the timeline for diligence only increases, since the marketer will dig even deeper to get comfortable with the background of the manager, the team, and the historical performance of the pm. Furthermore, marketers that don’t conduct their own due diligence are not providing the kind of service investors expect.
Our Advice – Ensure that your marketer does a complete job on the due diligence process. This should include the completion of a DDQ and the organized set up of a data room. These are not unique offerings by marketers, they are the minimum requirements to earn the respect of the investor community.
12) If You have met One Investor, You have met One Investor
Investors are all different and will have different expectations. A singular strategy won’t work. Being prepared for any situation or any investor is the smartest way to approach a multi-faceted fundraising campaign.
Our Advice – Define your audience early. Your outreach strategy should be well-thought and directed towards the specific types of investors you are trying to engage. With that said, 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.