Capital Raising During COVID-19

Elana Margulies-Snyderman:Hello and welcome to the EisnerAmper podcast series. I'm your host, Elana Margulies-Snyderman. With me today is Greg Royce, chief investment officer of Maximus Long Short Equity, a low net exposure industrials and materials focused hedge fund. Hi, Greg. Thanks for being with me today.
Greg Royce: Thanks for having me, Elana.

EMS: Greg, tell us a little bit about your firm.
GR: Sure. We are a low net exposure, sector focused long short equity strategy. Prior to starting Maximus at the end of 2018, I was a portfolio manager at SAC capital advisors, Visium asset management, and Citadel asset management, where I focused on my respective sub sectors and have done so for the last 13 years. Despite the COVID-19 pandemic, we've experienced significant growth. We started 2020 with 15 million of regulatory assets under management, with one separately managed accounts, and are now managing 163 million spread across multiple separately managed accounts and our recently launched onshore co-mingled vehicle.
EMS:Greg, the robust growth your firm has had this year definitely stands out during this extremely challenging year that the industry has faced. Can you tell us where those allocations came from?
GR: Sure. We received a large increase from our first investor who launched their managed account in September, of 2019. They increased their capital six fold and locked their account through 2022. That was a positive for our firm because of the AUM increase. Also because of the strong show of confidence from our longest standing investor, illustrating their satisfaction with our portfolio management strategy and performance. We also launched a new $60 million managed account in May with a well-established principal investment management firm that has been in business for over 40 years. We had the fortune of meeting with them in person before the quarantine began in New York. In addition, we launched our onshore commingled fund in July after building strong interest over the past year and a half and have doubled the size of that fund. Since inception, since March, we have focused more heavily on continuing to build relationships with investors that we met in person prior to the pandemic, rather than initiating new ones with groups. We haven't had the opportunity to meet face to face.
EMS:Greg, what was your strategy for capital raising this year in a mostly virtual world?
GR: Well, we've continued to keep our existing and prospective investors updated regularly with monthly letters, calls, emails, sending materials, like our risk reports and monthly write-ups. We've always had a focus on transparency and have enhanced it even further over the past six months. We've also attended a few virtual conferences and have been using Microsoft Teams for video calls to maintain a human element in relationship building.
EMS:Greg, what were some of the biggest challenges you face capital raising currently?
GR: Well, capital raising has gotten a lot tougher since COVID-19 hit. Prior to March, we were regularly meeting with allocators in person which plays an irreplaceable role in building relationships. The pandemic has also created a lot of uncertainty, which has made some allocators hesitant to invest until they have a better sense of what to expect. The disconnect between the stock market and the economy has further heightened this uncertainty. This is the largest six month rise of the forward PE of the S&P 500 since the data began being tracked in 1990. Evaluations have risen even faster than they did at the height of the .com bubble. That is very hard to justify under current conditions, including 10% unemployment. So many businesses shut down or struggling ambiguity regarding schools being open, et cetera.
EMS: Greg, what advice do you have for managers who started with similar AUM, to you at the beginning of the year to capital raise?
GR: Yeah. I would just say stay the course, manage your expectations and budget to accommodate for a longer funding horizon. I would also add to just continue to keep focused on performance.
EMS:Great. Greg, once the pandemic is behind us. Do you anticipate capital-raising virtually will continue or do you anticipate a hybrid of in-person and virtual meetings? What are your thoughts on this topic?
GR: Yeah. I think people will be eager to get back to in-person meetings. I think we'll see increased efficiency from technology to minimize extend their long distance business trips, but I don't think it'll fundamentally change the way people do business. A lot of allocators have already been hesitant to amend their due diligence procedures, to eliminate the in-person requirements. While they may make temporary adjustments if they need to replace a manager near term, I don't anticipate them lasting after the pandemic.
EMS:Thank you for sharing such valuable insights on capital raising. Greg, I thought the next topic we should address would be your outlook for various industries and what you feel presents the most attractive investment opportunities currently.
GR: Sure. I'm glad you've asked this question. While there are many technology media and telecommunications or TMT funds, healthcare funds, we believe there are significant opportunities for alpha generation in the industrials and materials sectors with plenty of interesting sub-sectors and ideas to choose from. With COVID-19, there have been some very clear winners like the do-it-yourself, building products and HVAC sectors as people spend more time fixing their homes and while rates are at zero. We believe these trends will continue for some time.
EMS:Greg, what other investment areas do you think will generate alpha going forward?
GR: Sure. Transportation as the economy gets going again, because more goods will need to be shipped to keep up with increasing demand. Additionally, given the market has rallied to all-time highs. Most likely much of the cyclical upside to the market has run its course here. We're looking at interesting idiosyncratic opportunities as we seek to generate alpha, regardless of what the markets do.
EMS:Greg, what about the areas that might present some significant challenges going forward and why?
GR: Challenge sectors include non-residential and aerospace because state and municipal budgets are likely to be hampered for some time due to the pandemic. Same with the aerospace industry. The most recent example is how American airlines announced on August 25th, that they will cut 19,000 jobs if federal aid lapses.
EMS:Greg, the next topic I would like to discuss, very important still this year is, how did you adapt your business during the pandemic?
GR: My team and I have been functioning seamlessly from separate locations as our it infrastructure was already set up to accommodate remote work. There have been no issues or disruptions. We have a shared drive where we save all important documents. We use Microsoft Teams and Bloomberg IM to communicate all day every day and we have a daily team call.
EMS:Great. Greg, what are your future plans for Maximus Long Short Equity looking forward?
GR: Yeah. To continue growing the AUM and even more importantly, generating solid risk adjusted returns for our investors while keeping the business focused and lean.
EMS:Greg, are there any final or concluding thoughts you'd like to share with us today?
GR: Given the market is at all-time highs with significant risks to the economic and political landscape, this is a good time to reassess existing portfolios. We understand in this new reality that the inability to travel and visit potential managers has added an extra burden to allocators, which is why we've been scheduling video meetings and are extremely transparent in terms of materials we're willing to provide including risk reports, idea write-ups and sample portfolios. We think the ability to adapt to unprecedented market conditions and an increasingly difficult capital raising environment will be crucial going forward. Funds that are disciplined, nimble, and willing to accommodate investors are the ones that will succeed.
EMS: Thanks, Greg, for sharing your perspective with our listeners and thank you for listening to the EisnerAmper podcast series. Visit EisnerAmper.com/FS for more information on this and a host of other topics. Join us for our next EisnerAmper podcast when we get down to business.