Financial Services Insights - Nov 2010 - From the Bar...Taking it to the Next Level

As mature investment managers strive to grow their businesses, they begin to face issues much different than those encountered during their initial formative phase. This article addresses the issues that these maturing managers need to consider.


There are only so many variations of the same strategy. So if a mature manager (especially a larger one) is starting to lose its return edge, that could pose a problem relative to newer, more nimble peers. While the mature manager may be able to point to "long term consistency," the manager nonetheless must be mindful of the competition, take corrective portfolio actions, and even consider stopping (perhaps temporarily) to take in additional capital that can lead to stressed performance and disgruntled investors. The manager should let available investment capital allocation opportunities and long-term traction be key drivers in this decision.


Many managers are known for a particular "flagship" strategy. Some managers use the flagship product as an opportunity to branch out into other areas (e.g., including other strategies and even less liquid vehicles), with an already existing client base as a great launching pad. Some managers elect to stay within the same strategy, but consider setting up other types of investment vehicles to accommodate a different investor audience (e.g., a mutual fund can reach lower net worth investors). This expansion must be carefully planned. While it can create investment diversity for existing and prospective clients who might otherwise go elsewhere, it could also hamper the firm. First, if the main portfolio manager is involved with the new product, it could be viewed as distracting from the primary flagship focus. Second, if the new business underperforms, it may to some degree taint the entire platform. Finally, the operation of the new product may create internal issues relating to taxation, compensation, staffing, office location and administration, as well as conflicts and related compliance issues.


As the firm becomes more prominent, the manager may wish to take steps to strengthen the brand's appeal from an institutional investor perspective. Some managers, at this stage, consider obtaining trademark protection for their name. Others change their fee and/or liquidity terms to make them more institutional investor-friendly, and a number of managers even establish prominent, independent industry advisory boards. Finally, beyond these undertakings, many mature managers will also look into registering with the SEC (if not already the case), as well as hiring third party consultants and solicitors with institutional investor relations expertise.


As the firm matures, the manager must neither rest on its past laurels, nor take investors for granted. Besides strong returns, communication is probably the best way to keep investors satisfied. So it is imperative that investors be apprised of what is happening with the business. Many larger managers host annual investor events, monthly calls or even have one-on-one meetings with key clients. Some even survey their clients before undertaking major firm actions. Still others offer greater transparency to their investor base. All this is done to make sure that investors feel truly connected to the business, understand the story and are able to provide useful feedback to their managers.


As the firm matures and overall outside demands become greater and more sophisticated, the manager must make sure that the right team is in place. Hiring and, of course, retaining key personnel becomes crucial to the future success of the business as the manager seeks to add perhaps a general counsel, additional investor relations, and administrative and accounting personnel, as well as investment professionals. In conducting this process, the manager must consider various factors. First, the manager should strive to maintain the original firm culture that helped get the firm to its current stage, while at the same time understanding that new employment/compliance policies, risk management guidelines and employee reporting lines may need to be created as the firm grows. Second, the manager must figure out the best way to keep key personnel incentivized. With success comes greater outside job opportunities for firm personnel. The manager should work with counsel, employee compensation consultants and industry experts to achieve a plan that rewards important team members immediately and also encourages them to stay for a long time, creates workplace stability, and elicits positive buzz from within the industry. Finally, even with a great hiring and compensation process, it is inevitable that some personnel will depart – so the manager must also ensure that such exits do not result in the theft of confidential information such as proprietary strategies and investor lists, the poaching of employees and clients, and the cropping up of new competition.


Many mature managers may want to reevaluate their evolving financial goals and needs. First, if the manager has children, and has not already done so, consideration should be given as to whether now is the time to undertake some estate planning, as there are some interesting techniques that managers have utilized in this regard. Second, if the manager has a seed investor, as many nowadays do, the manager may wish to approach the seed investor to take advantage of any buy-out clauses in the deal and, even if there are no such clauses in the seeding contract, consider trying to negotiate one. Lastly, the manager may want to commission an in-depth tax study around the firm's operational structure to determine whether adjustments can be made that could result in a significant additional economic windfall to them.

Getting to the mature investment manager stage is a great thing and a very nice, high-class problem to have. However, in order to grow the firm from there, the manager should be aware that there are various issues that will determine the longer-term success of the enterprise.

Steven Nadel is a partner in the Investment Management Group at the law firm of Seward & Kissel LLP, the law firm that established the very first hedge fund.

Financial Services Insights - November 2010 

Have Questions or Comments?

If you have any questions about this media item, we'd like to hear your opinion. Please share your thoughts with us.

Contact EisnerAmper

* Required