Capital Markets: Fundraising in a Heightened Regulatory Environment
With institutional investors allocating more capital to a smaller number of alternative asset managers, plus the enhanced regulatory requirements funds are obligated to comply with when showcasing their performance, managers are facing greater challenges when vying for the next AUM level. However, the good news is allocators are paying more attention to smaller managers, particularly if they employ a niche strategy, and are investing in them via seed vehicles or simply going direct. At EisnerAmper's Asset Management Group's Fall Connecticut event at the Indian Harbor Yacht Club in Greenwich, a quartet of industry veterans addressed the challenges of asset raising, adhering to regulatory requirements when stating returns, and successfully receiving allocations.
- Managers are having an even harder time garnering the interest of investors as institutions are consolidating the number of managers in their portfolio, arguing there is less of an administrative burden when hiring fewer funds.
- Institutions continue to be concerned about ‘headline’ risk. Therefore, managers need to ensure they have robust valuation policies. For start-up firms, it is imperative that the founder has a concrete plan to hire a chief operating officer, which will give more confidence to allocators.
- Alternative investment managers need to be cognizant when advertising their performance to investors and make sure they show their net returns, not gross returns, and also divulge their drawdowns.
- Additionally, allocators want to be assured managers follow the industry standard Global Investment Performance Standards (“GIPS”) principles to calculate their performance and give them the transparency they need to analyze funds.
- Further, investors encourage managers to demonstrate not only how they achieved their returns previously, but what they will continue to do with their portfolio going forward to generate outperformance.
Know Your Investor:
- It is imperative that managers develop a continuous, long-lasting relationship with investors, constantly updating them on a monthly or quarterly basis with investor letters, emails or phone calls.
- Managers need to tailor their pitch books and marketing documents for the type of allocator they target, whether it is for a family office, pension, endowment, or other type of investor.
- Firms need to familiarize themselves with the LP’s upcoming allocation plans.
- Be prepared for rejection: Even if a manager is initially rejected by an investor, it is imperative that manager still continue to keep in touch them. Over time, that allocator might get comfortable enough with them to invest or might have the mandate for their investment strategy. In the end, the capital raising process takes a long time, sometimes years, and managers should be prepared for that. And as institutions have expressed more of an interest in smaller managers, it is an encouraging sign for those firms to get on the radar of more investors.
EisnerAmper would like to thank the panelists for their insights they shared:
- David Cranston, Managing Director and Co-Head of Business Development and Marketing for Investcorp's Hedge Fund Business
- Jack Foster, Managing Director, Private Equity Specialist, Commonfund
- Edgar Barksdale, Jr., CEO, Federal Street Partners