Capital Raising Considerations for Alternative Investment Funds
July 06, 2020
By Matei Odobescu
Capital Raising Overview:
While the market volatility during the current year benefited some fund managers, capital raising remains a hot topic for new and existing fund managers. The pandemic brought challenges to the capital raising process: no travel and no in-person meetings, and a reliance on being able to do the capital raising process remotely. On June 26, EisnerAmper hosted a webcast on “Capital Raising Considerations for Alternative Investment Funds” to discuss this topic in greater detail and provide some capital raising insights in the current environment.
- Eugene Tetlow, Senior Manager, EisnerAmper (moderator)
- Daniel Cohen, Managing Director, Layton Road Group
- Alex Fyfe, Director, Prime Services, Wells Fargo
- Michael Zeuner, Managing Partner, WE Family Offices
Below are key highlights from the discussion.
Current State of Capital Raising:
- In the current year, allocators have faced unprecedented pressure. During March 2020, allocators faced the challenge of what some called an “immediate scramble,” having to do a rebalancing exercise across managers; in April and May, allocators were looking to fill in the gaps that they had in their portfolio.
- This move from the defensive play to more of an offensive one had allocators look to the groups that they already knew or the managers that they have been tracking.
- A big hurdle was the operational due diligence (ODD) process, which in the past included numerous in-person meetings and travel but in the current environment had to transition to a virtual ODD.
ODD Process in the Current Environment:
- Considering the current constraints, many allocators have looked at managers they have allocated money to in the past and for whom the ODD process was previously completed.
- For other managers, they would look for investors who would be willing to share their ODD.
- More important than ever, allocators are now relying more on the brand name of the service providers to provide additional comfort and overcome some of the current ODD hurdles.
Differentiators for Capital Raising in the Current Environment:
- Be creative and engaging: Personal relationships do matter and now it is a time to rely on your current investors in the fund to educate them on the current market conditions. Remember, education is a form of marketing.
- Work your network and rely on current connections; do not cold call or send first time introductions via email or LinkedIn, as allocators consider that “noise.”
- Performance is like safety on the airline: necessary to fly but not the only reason people fly the specific airline. Fund managers need to answer the many questions around performance, such as how did they react to certain market events and what was the outcome.
- Investor relations should not have the goal to sell, but rather to learn something about the investor and their needs. It is important to be honest and direct. Personal relationships matter at times as much as the performance.
- Fund managers can stand out by communicating in volatile times even intra-month. It’s important to educate investors about what is going on and how the manager’s strategy is performing in the current market.
- To get on the radar of an allocator, fund managers should work with their service providers to see if they can attend virtual events put together by their service providers. This raises the manager’s visibility, while not adding any travel-related expenses.
- Managers need to be able to articulate what makes them unique and present it to allocators in a succinct way. The goal of the first meeting is to get a second one; therefore it is very important to articulate things well.
The Perfect Meeting from an Allocators’ Perspective:
- The meeting should start from a commonality. For example, the allocator previously invested with the manager, knows the manager or knows a limited partner who currently invests with the manager.
- The fund manager should be able to explain their investment thesis clearly.
- The fund manager should engage the allocator in a conversation: There is no need to go in great detail through the pitch book, as the purposes of the meeting is not for the manager to tell their story but rather to create a dialogue.