On-Demand | Navigating Growth--Considerations for Fund Managers
- Oct 21, 2020
Our expert panelists reflected on lessons learned in 2020 and discussed trends emerging in today’s market.
Bonnie Sussman:Good afternoon, everyone. Thank you for joining our webinar today. I hope everyone and their families are safe and well, my name is Bonnie Sussman and I'm a partner here in the financial services practice at EisnerAmper. Today we'll be discussing growth considerations for fund managers, as they expand. Our panelists will reflect on lessons learned in 2020 and discuss trends emerging in today's market.
This includes fundraising strategies, implementation of fund structures that align managers and investors and solutions to operational and tax challenges. But first, I would like to introduce our special guests. We have Nicole Belmont, Managing Director at Far Hills Group. Far Hills Group is a financial services firm that specializes in the placement of alternative investment offerings to institutional investors. We have Beth Mueller, Co-founder and Chief Operating Officer and Socium Funds services. Socium is a fund admin group that specializes in private credit, private equity, venture capital and real estate funds. Last but not least, we have Amanda Nussbaum, partner in the Tax Department and private funds group at Proskauer. Thank you to our amazing panel for sharing their insight with us today. We look forward to your questions.
Please feel free to put them in our Q and A chat box. So, to start off this conversation, I would like to turn this panel to Beth. Beth, what is the greatest challenge you see amongst growing fund firms, both in general and in the current environment?
Beth Mueller:Thanks Bonnie. Thank you so much for having me today. It's a pleasure to be here. Yeah, I would say the greatest challenge for a growing fund firm, in a lot of ways, it's the same challenges that faced any growing business, strategic planning of their infrastructure and operations, trying to figure out what things they should do themselves and what things they should outsource, finding and retaining talent, building out their technology infrastructure. But the challenges that are most unique, into fund manager in particular, I would say, in this environment is the scrutiny that is placed on every area of their business operations, as they try to grow and attract a larger, more institutional investors.
And of course that makes sense. Any prudent investor would perform their due diligence on someone before writing a check. But I would say that the level of scrutiny that investment managers face today just continues to grow. And in many ways, it's not only that the barrier to entry has become greater, but I would say that the barrier to growth has actually become greater. Because once you've gotten past the issue of the costs of launching a fund, which are much higher today than they ever have been, in order to grow your firm, there's an expectation from institutional investors that you're going to have robust controls in place, reporting transparency, cyber security, and all of these types of things that are not inexpensive. They require a lot of time and thought.
And I would say that they're all a requirement in order to expand. And then, oh, you also asked about, the current just today, this current environment, that we're in with the pandemic, which is an extra challenge that we all needed, with no end in sight. I would say that really the main challenge for a fund manager in this specific environment is to be able to maintain all of the things that I just discussed, but from a remote working environment. And I'd say that it's equally important, to be able to do this and to communicate your investors at a time when communicating is more challenging.
But I would say that it's important to not only keep investors informed, of how their performance and the fund is doing, how are your investments performing? But in addition to that, how you are able to keep up with your controls and data protection and cash management and all of those kinds of things, in this particular environment where everybody is working remotely.
Bonnie Sussman:Thank you, Beth.
Bonnie Sussman:Amanda, I would like to turn the same question to you to get the legal perspective of this. So what is the greatest challenge you see amongst growing fund firms in this environment?
Amanda Nussbaum:Thank you so much, Bonnie. And thank you for having me here today. So I'd like to touch on two things. The first is to expand a little bit on what Beth was saying. We agree and we see all the time, from the legal side, that as a growing firm, you need to keep up with the infrastructure and especially what LPs demand. As you're moving from friends and family to institutional investors, the investors need to grow on as Beth mentioned, diligence, then also on reporting.
Some investors may follow the ILPA guidelines or may have their own templates for reporting that could potentially be onerous. And it's totally okay to outsource, especially if you're not big enough necessarily to have that internal structure, but you need to have a plan how you're going to do it. For example, in the increasing regulatory world we live in, how are you going to comply with AML, how you're going to comply with SEC regulations, ESG inquiries, diversity inquiries. You know you're going to get them, even if you may not have good answers on some of them, to be prepared to answer the questions.
The second thing I wanted to touch on, and that is sort of more of our view from the legal side, rather than necessarily, a legal answer to this question, is that I think people underestimate the value, of needing to grow and develop an investor portfolio and to nurture those relationships the same way you would nurture your own stock portfolio. That it shouldn't be the case where you're moving from fund I to fund I that you have to start fundraising, and – I know Nicole will talk about it a little bit later that you need to start fresh, that you want to treat your anchor investors, as your prized possessions, and be able to maintain and continue those relationships. And that's going to help on diligence as well because when new investors come in and they see that you had repeat investors, investors that have been with you for many years, it will help them also get comfortable on the fund. And I think that when you don't have a stable LP base, it does eventually raise red flags to investor.
And I guess to touch on the COVID impact – actually just to add a little bit what Beth was saying, I would turn the current situation potentially into a positive. That on the one hand, site visits have become, pretty much impossible, but firms have started to figure out ways, as Beth was talking about, to deal with that by having webinars like this, or by having electronic data rooms. And we even heard from, as an anecdote from one of our LP clients, they actually found that this was a positive because they had a team that was abroad, in different locations, and it was often hard to organize, a conference call or a site visit.
It might be expensive to be bringing everybody in, from all different locations. But because now people are doing things online and because those things are cheap it actually gives the ability for their team to watch something at different times to provide more information. So while the current situation, we all want to end very, very quickly, there may be some things that we can take from it to help make the diligence process better in the future.
Bonnie Sussman:Okay, great. So next, Amanda, I would like to start off with my next question to you. Are there any particular fund structures that are more appropriate for firms that have grown past their first friends and family fund?
Amanda Nussbaum:Thank you, Bonnie. So this is like the first question, when you are moving in terms of friends and family investors to more institutional investors, then that you'll often see increased reporting, great diligence requests.
You'll also often see a lot more complex fund structures, and that's because of the requirements of some of those investors, if they're tax exempt or foreign investors and wanting to minimize their exposure to certain types of income or having to file tax returns and the fund needing to build out the infrastructure to block those investors from that type of income, and to try to make the fund investment more tax efficient as a whole.
And I think that this is often - a shock to some managers who started out with a simple structure, if we're talking on the private equity side, a single fund vehicle, and now all of a sudden have to think about, parallel funds, feeders and blocker structures. And there could be a big cost in moving to that structure, both in terms of the legal costs and audit costs of having to now audit multiple vehicles.
But also just administratively in terms of your own staff and being able to keep track of all of those vehicles. And a lot of times people don't plan ahead for that. And just say, "We'll fund raise, we'll see who comes and then, we'll build it if we need it."
And I think it's very important in the context of the fundraising to have a plan as to how you'll be able to implement those structures to the extent you've raised money from certain investor groups. Obviously, whether those structures will really be required will ultimately depends on what the fund strategy is and what type of investments that you make.
Bonnie Sussman:Thank you, Amanda. So back on the accounting side, same question. Are there any particular fund structures that you think are more appropriate for funds who've grown past their friends and family? Friends and family funds from operational protocol?
Beth Mueller:Well, I definitely agree with Amanda's sentiment that it can come as a shock, to a fund manager, if it is determined that they need to have a more complex structure for their second or third funds. I would say though that what I really agree with that she said is that it's important to, I wouldn't necessarily, I don't think one should assume that you need to make your fund structure more complicated just because you are raising institutional funds. And I think the most important consideration as Amanda mentioned is, what are you going to invest in?
What's your strategy and who are the investors? Because, I guess my one piece of advice would be don't make it overly complicated, unless you need to. Try to keep it simple, if you can. There are reasons why you may need to make things more complex, but I wouldn't necessarily assume that it has to be that way right from the start just in order to grow. And so, take into consideration, who is going to be the investor base for this fund, what are you going to invest in, and try to, in order to mitigate the shock of what would be expected with a particular fund structure, try to educate yourself ahead of time.
Once you add an offshore feeder to a fund structure, it opens up a whole new realm of regulatory considerations, that wouldn't have been a factor say if you had your standalone, Delaware LP, or Delaware LLC. For example, a Cayman entity is going to have to follow Cayman AML and CFT regulations, that requires a look through process for each investor who comes into the fund. That is an entity versus an individual. And many institutional investors do subscribe under an entity name.
So, the AML, process is much more involved from that perspective. There are also additional seats that need to be filled at the fund level. So, an anti-money laundering reporting officer needs to be named, there's FATCA and CRS reporting to consider. And then also a Cayman entity though, you don't need a Cayman licensed administrator. You do need to select an auditor, who has a local presence and Cayman. So, there are lots of fees and service provider factors that come into play, when you're thinking about going with a more complicated fund structure.
Bonnie Sussman: So, I would like to shift our conversation to fundraising. Nicole, that's all you. So Nicole, how has COVID-19 affected fundraising.
Nicole Belmont:First, thank you for having me today. Fundraising has been greatly affected by COVID-19. In March, the fundraising environment pretty much shut down. But since most managers have made a comeback in performance, but in person meetings and conferences remain virtual for the foreseeable future. As far as capital flows, after the initial panic, investors began responding to opportunities from their existing managers. Managers already in their pipeline or large established managers. And there were some opportunities that arose directly from COVID.
And family offices, high net worth individuals were able to adapt fairly quickly. For the most part, they adjusted to the new environment had been making allocations. But for institutions it's harder. It's much more challenging, their process is rigid, it's not as flexible. But they've realized they can't stay on the sidelines forever. We all know the pandemic is longer than we all thought it would be. So they're moving in the right direction, trying to make plans to invest virtually and hopefully have plans in place by year end.
Bonnie Sussman:Thank you. Have there been any liquidity terms that are more preferable to investors in this current environment?
Nicole Belmont:I can't say I really have been seeing anything specific to this environment. All in all our belief is always that your terms need to match the underlying investments. So if you're a manager, you're investing in large cap liquid stocks, and you have stringent liquidity terms, you have lockups engaged, you really don't need them, you want them. So you're going to get investor pushback. But on the other side, if you're a distressed manager, you shouldn't necessarily be launching with a monthly 30 fund. So I would say just ensure that you could manage your strategy to meet liquidity terms effectively.
Nicole Belmont:So nothing is specific to this environment.
Bonnie Sussman:Sure. Are there any specific strategies that have been getting more attention recently?
Nicole Belmont:Yes, absolutely. Life sciences and technology have been getting a lot of attention. They're timely. They've performed well this year. We've seen interest both on the public and private sides.
Also, there's been a lot of credit managers that had large fundraises. There's some interest in distress, but given the markets bounce back, we feel that like a lot of investors are still waiting for the other shoe to drop as far as distress goes. And also, lastly, we're seeing interesting discretionary global macro strategies.
Bonnie Sussman:What fundraising strategies and considerations might be useful to a manager audience at this time.
Nicole Belmont:Sure. So if you're a manager looking to raise capital, you really need to adapt to the current environment. So you need to master virtual meetings, you need to find ways to stay in front of your investors, and also ways to facilitate the investors diligence process since that's changed as well. So I know virtual meetings, they're common place now.
But it's more of a virtual meeting, but just changing out of your pajamas, combing your hair and logging on. And there's really a skill set involved. So thought practice planning should go into producing a polished virtual pitch. Also with the virtual meetings, we've always had a lot of managers in all times said it was, we don't want to follow the pitch jack. We'd rather have a conversation with the investor we feel it flows better. And a lot of times you can get away with that and in person meeting, we feel like in a virtual or zoom environment, it gets really easy to get off track by doing that. So we encourage managers to use their deck. It helps them stay on message, and it also ensures that they're hitting all the points that they want to leave an investor with. And also lastly, there is zoom fatigue.
So attention spans are finite, stay on message, stay concise and be mindful of everybody's time. And then secondly, your communication has changed now, the level of contact and transparency need to be better than in pre-COVID times. It's important to be high touch, be in contact, be transparent. And do that also in a value added way. So for example, if you spoke about positions in your last letter or on a call, and then there's been a news event, or they reported earnings, that's a great email to send to investors. That's appreciated, it's value added, it's informative. Also write those monthly and quarterly letters and be timely with them.
So they're much more effective if they're coming out a few days after the month or quarter, rather than, months or weeks later. And actually I've seen a lot of managers being more timely with their performance and communications during COVID.
So maybe that's a great benefit that has come out of it. And then lastly, as I said, facilitate ways for your investors perform their diligence process. So, some ideas, I think Amanda touched on some before, so maybe host operational webinars, host virtual office tours also for the private equity and venture managers, bolster your data room, add video clips, maybe interviews with your CFOs or other key operational personnel.
Also readily share information that you reserve for onsite visits in the past. And also references have always, been at the end of the process, but if you have strong references, offer them up early, it's great to have important people that could vouch for you. And then lastly, align yourself with quality service providers.
Bonnie Sussman:Those are really great points, Nicole. Thank you. Actually another question is, should some managers have the service providers in place before they start fundraising?
Nicole Belmont:Yes, it's. I believe so definitely. You really want to have a concrete offering before you go out. In last year, going out for a seed capital, if you're going out to investors, you need to have everything in place before you do. So it has to be more than an idea because investors don't want to waste their time and efforts on diligence and research on the fund, if they're not sure it's actually going to get launched. And if you have quality service providers, it says to the world that you're launching, that you're real, that you're ready to invest the capital into your firm to get it established.
Bonnie Sussman:Thank you. So last, what are some important qualities that institutional investors look for in a matter manager and what are some due diligence procedures that they have in place for?
Nicole Belmont:So, the vetting process, can be broken up into two parts. There's operational diligence and there's investment diligence. So, investment diligence, that's your pedigree process performance. So pedigree, that's easy. That's your background, your education, where you've worked up before. Process, this is your messaging. So be able to clearly articulate your investment process while focusing on how you're different and also ensure that it's repeatable. And then performance, we all know how important performances to investors. But we also say with performance, don't tell me, show me.
So back it up with data. Show investors how you're generating that performance. Is it because you have uncorrelated positions? Is it because of your sizing or adjusting the exposures? It really resonates with investors if the numbers are behind your performance and it brings it alive, really. And then the second part, operational diligence, Beth mentioned it before level of scrutiny is higher than ever. It's been higher than ever, but also COVID just intensifies that. And there's a range of non-investment activities that require assessment. It's business continuity and compliance and legal and role of management committees. But I really don't think there's a secret sauce to pass the operational diligence.
I think it's really just making sure when an investor is doing diligence on you, that they could check every box. That you all have your policies and procedures in place, all of your manuals, compliance, operational manuals, they've all been updated. And really, look at your infrastructure. It needs to be robust. And if there's any holes it's perfectly acceptable to outsource, especially for an emerging manager. Amanda had mentioned that earlier, there's great firms that provide outsource CFO, COO, middle and back office, align yourselves with them. It only helps, with investors doing their diligence and, bolsters your organization.
Bonnie Sussman:So I'm actually curious. Has there been any fee pressures from investors? And I think you can touch on that and then Amanda can also touch on that as well.
Nicole Belmont:Sure. There's been fee pressures for years I would say. I don't think anything, relative to the current environment, but absolutely there's fee pressure in the industry as a whole and there has been for a long time. Days or two and 20 are gone. Founders share classes are really common. Most people launch with them. I'd say, we're seeing more fees of one in 20 or one and a half and 17 and a half more than even one and a half inch 20. So definitely fee compression over the years. You can get away with it, with great performance. You have great numbers, you get away with higher fees. I'd say that, but all in all, it's been an industry trend for a long time.
Bonnie Sussman:Amanda.manda Nussbaum:Thank you. So I think Nicole was focusing more on the hedge side, so I'll take it, on the PE side. And I echo what Nicole was saying that we haven't really seen anything specific to COVID and any specific fee pressures. But there's definitely been a trend in fee pressures over the past, even 10 years. And I think that what we see as a response to them, and we're continuing to see it is, for example, early closer discounts, and those could be, if you come in early, you have a reduced fee.
Or also if you come in early, there may be a fee holiday, and this is the management fee side for a certain period of time. We also see discounts to investors who write really chunky checks. Like if you're coming in with 150 million or 200 million commitment, you'll get a large fee discount. And if this is a very large size fund or, obviously scaled down, but still large for, dependent on the size. So we're continuing to see that.
And then I think the last trend I just want to talk about is, I think we've seen an increase in the types of expenses that could be pushed as fund expenses that, years ago, you would have thought of those expenses really as manager expenses, that they should be borne by the manager, and instead they're now being pushed as fund expenses, which is a way to be able to basically increase your management fee without increasing your management fee, if you're able to push off those costs.
And we see it in two ways, first just delineating certain expenses, charging the things, whether it is certain types of SEC compliance or other regulatory compliance expenses that otherwise would've been management company expense now being pushed to the Funds. We've also seen funds, and this is more with the larger funds that have the infrastructure, charging their internal costs and doing it two ways, either charging their internal legal fees, internal accounting staff fees, and just charging those expenses as a direct line item. But we've also seen certain funds build in an administrative fee. That says we're giving you this fee or whatever it is, like 2.5 basis points or some other number that we're going to charge you on an annual basis to account for these internal fees that we're able to push to the fund.
And I think especially if you are charging an admin fee, rather than charging the line items, you really need to, in order not to lose investor confidence, be transparent on that fee. And that's obviously a word Nicole touched on transparency. Because I think charging investors for fees that they really think are more appropriately manager side, or just adding on an additional cost instead of bumping up your management fee, it can get investors obviously to lose faith in you, unless they have an understanding as to why they're being charged.
Bonnie Sussman:Thank you, Amanda.
Bonnie Sussman:So the next question is to Amanda, and this is a big one. What tax rules should growing managers keep in mind. Big loaded question, Amanda.
Amanda Nussbaum:Thank you so much. So I'm going to split this into two topics. The first I'll talk a little bit about the general tax rules that managers should keep in mind. And I think it's both growing managers and existing managers. And then the second thing I'd like to touch upon and not spend too much time on it, because it's obviously very uncertain, but potential tax reform and things that you should potentially be thinking about to the extent some of those potential proposals, I can't even say proposed tax rules, because it's just that, a list right now, but depending on whether any of these ends up becoming actual legislation.
Then starting with the first topic, the two main things to really talk about here are 1061, or I should say, carry /carried interest. And the second thing is management company structure.
So on the first, in light of the tax changes in the 2017 tax act, carried interest is now subject to a rule where it's a holding period rule that's different than the general holding period rule for capital gain that applies to investors. So instead of the general one-year holding period, there's a three-year holding period. So I think that that creates lots of different issues from the legal side, in terms of potential conflicts with investors in terms of hold period for investments, whether you should hold something for three years in order to be able to meet the holding period, but it also creates opportunity for planning and specifically what you should be doing about it.
And I think that type of planning is also very different if you're on the hedge side and you're versus being on the PE side. And I'm saying hedge versus PE in very general terms, just because in hedge, most of the time, you're not holding investments three years, you barely may be holding it for one year versus PE where many types of funds have longer holding periods.
So on the hedge side, I think we would just say that you should consider whether you really should be structuring your carry as an allocation versus structuring it as a fee in light of tax reform. There still could be potential benefits of an allocation, even if the underlying income ends up being all short term gain, just because of the potential deferral depends how quickly your portfolio turns over assets. And whether there could still be deferral if you structure it as an allocation, but if you structure it as a fee, as long as you're taking it on an annual basis, you don't have to worry about certain deferred comp rules that could apply.
Then there may be potential ways to at least have some Medicare tax savings, depending on your structure, which is going to get into the management company side of things. So while everyone always thinks allocation, allocation, allocation, never a fee, there could be sometimes due to this legislation, why structuring as a fee actually may be better for you than structuring as an allocation. On the PE side, there's really so much to be thinking about here. The first is mechanics at your fund level. Do you potentially want to waive gain from investments that are held less than three years? You want to build in that infrastructure, even if you never may use it, that's going to depend on your fund strategy, whether you think having an investment that has less than a three year hold is really more of an outlier.
So there's potential planning at the fund level, also portfolio company level. There may be ways that you may want to finance investments, not to restart a holding period. There may be other ways hold an investment where you may be able to get a tacked holding period to try to fit into the three-year rule. And I'm only just touching the surface, but I think that there's a lot of potential planning around that. With that obviously have to caveat that who knows what can happen in the next administration, that the version of the carried interest rule that passed as part of the TCJA was much narrower than prior versions, which were taxed all carry as ordinary income. So to the extent there's a change in law, then this planning may not matter.
The second piece of it is management company structuring. So, and on that side, we still recommend structuring as limited partnership versus using a limited liability company to potentially take advantage of the tax loophole that still exists, where you could eventually be getting some Medicare tax benefit on any allocations or should say your distributed share of partnership income above your base salary and bonus. So there may be some tax planning involved in that. You need to be obviously careful in terms of your tax planning to make sure that the structure has substance.
And this is a loophole that has potentially been almost shut down many times in the past. There's been proposed legislation on it as recent as in 2017, so that's something we'll need to look for. But one of the tax reform proposals is to, for earners in the Biden plan, earners over 400,000 to be having the social security portion of either employment tax or self-employment tax applies, there potentially maybe even more tax advantage doing this structuring if this loophole stays in existence.
Other things to be thinking about, before we just hit tax reform very quickly is a qualified small business stock. If you are a manager that's investing in more venture type opportunities, I think people always think it's better to invest in a flow through. And I think because of QSBS provision, corporate investments make a lot sense for smaller deals. And it especially makes sense now because of the hundred percent exclusion on the sale for either the greater of 10 million or 10 times your tax basis. The exclusion for QSBS stock, it ratcheted up from 50 to 75 and then to a hundred percent, and also in light of the 21% corporate tax rate, it makes it easier to hold things in corporations. If it's part of tax reform that corporate rate jumps back right up, then you'll have to weigh the tax leakage from using a corporate from versus the potential QSBS savings. So those are just three things to think about.
And I think in terms of tax reform today, I'm not going to go through the Biden proposals, what I think I really want to talk about today was the general theme that people are expecting tax rates to increase, whether it's ordinary income rates on high earners to go up, whether it's to apply to capital gains or to no longer have capital gains rates for high income earners and instead to have tax ordinary income rates.
The social security tax increase in terms of what base you apply social security to is now going to go away. So to the extent you earn over 400,000 where they used to be a cap on when social security could be applied, now no caps. So if you live in places like New York City, New Jersey, California, your overall federal and state tax rates, can be over 60%. And then corporate rates potentially can go up as well. So, I think the thing to be thinking about is to the extent anything gets passed. And obviously if it gets passed, we won't know the date on getting passed and how long that might take. And obviously a lot of stars need to line up.
It's not just the change in administration on the president's side, but now also the cards need to line up both houses. So, but the thing to be thinking about is if there are opportunities to sell investments this year, you probably want to do it. And then also are there potential transactions where even if you're not ready to sell, you may want to accelerate gain this year in order to be able to take advantage of what people think are lower rates.
I think unless you have an actual strategic buyer lined up right now, somebody wants to buy your business. I'm not sure the time is right, necessarily just to accelerate gain now, but we have a lot of clients that are thinking about those potential transactions in light of the increasing rate environment that may occur. And I think the last piece of that also is there may be potential changes to the estate tax planning rules as well. And if so, that is causing people to think about making gifts now and also potentially accelerating gain in light of some of those changes.
Bonnie Sussman:Wow. Really great stuff, Amanda. Anything else you want to add with respect to taxes? I know it's a big loaded question and you covered the upcoming possible tax rate increase.
Amanda Nussbaum:So, I think the only other thing I would mention is I guess the COVID aspect of it is a big question that's been on people's minds right now. And I am not going to be able to provide an answer, even if I had a couple of hours to do, is what's the impact of working from home on managers? And that's really a multifaceted question because first, for managers that were based in New York City, how does it impact your UBT and your UBT apportionment.
Then it's also on your employee side, right? In terms of what you need to do vis a vis withholding, whether you need to withhold, do you need to continue to withhold in your office, the employee’s main office location, versus now to change and somehow are they viewed as working in the location where their home is and does that analysis change if they're in their actual home versus people who have rented homes in other locations. So it may not be their permanent home, but it may just be a vacation type home. And does that change where they're doing business? And then the last piece of it is having employees now in all these different jurisdictions does that potentially change where you're viewed as a company, as having nexus.
And, unfortunately, there are a lot of states and cities that have not issued any guidance at all. There are some like Massachusetts, but actually issued COVID specific guidance that surprised it's neighboring states like New Hampshire, which has caused quite a controversy. And there are people that have guidance, but that guidance isn't necessarily helpful. And we are going to be living for a little bit with some of this uncertainty. And that uncertainty is not just a question of saving tax. It's actually making sure that you're not paying taxes on the same income in multiple jurisdictions, which could end up being paid to the extent certain jurisdictions don't provide for relief.
Bonnie Sussman:Thank you.
Amanda Nussbaum:I guess the last comment I would say is that we are advising people now not to necessarily change any of the withholding that you were doing for employees - that to stick with where their main office is, but that could certainly change.
Bonnie Sussman:Thank you, Amanda. Thank you. We have our last question coming up and I would like to direct that to Beth. Beth, are there any specific, special considerations or anecdotes you'd like to share with growing fund managers in the context of COVID-19 and being in lockdown mode?
Beth Mueller:Sure. So I would say, so when I was thinking about this question, I thought, I think my answer really is just to try to spice things up. I do think that people are a bit fatigued with the zoom meetings and all the rest. And it's just not because there's so much of a relationship building aspect of being able to take someone to dinner or go for drinks with them. I love what Nicole mentioned earlier about just organically reaching out to investors checking in with them because you saw an email and you wanted to pass it on having that kind of personal interaction.
I think is really important. And I would say, and I say that in particular, because there is a manager that I'm familiar with who last year had this great investor forum and it was in person and left such an impression on me as someone who works with a lot of emerging managers. It was just, it was so professionally hosted and the interaction was great. The energy was great and it's so hard to replicate that without being in person. And so I think that anything that you can do to try to keep building that relationship with your investors is really paramount right now.
Bonnie Sussman:Thank you, Beth.
So a lot of great questions came in thank you so much. And thank you to our amazing panel for sharing their insights. A lot of fundraising questions. And let me go ahead and just sort out these questions really quick. Let's see, Nicole, first question is for you. What are your thoughts on outsource CFO versus in house CFO? Where does current environment stand? Are managers being more inclined to outsource their CFO COO function? And lastly, are institutional investors amenable to outsource CFO. Do they have any concerns?
Nicole Belmont:Sure. Outsourced CFO are fine. I think it's a decision within your firm, whether you'd rather outsource or hire somebody internally. A lot of it has to do with your firm resources, the size of the manager, if you're at breakeven what your burn rate is for keeping the firm operating.
I mean, if you're a small fund and it's better for performance and better for the firm to bring in another analyst before you brought in a full time, CFO, perfectly fine. The organizations that are providing these services, you typically have large infrastructure and they're well-respected, you're getting a seasoned professional. So, institutional investors understand, they don't want you to grow your firm a way that doesn't benefit the firm in the strategy. So the understanding, especially for emerging managers. So I think it's really dependent on the firm itself how much capital they have and how much they capital they could afford to spend, but either way, it's fine. It's acceptable.
Bonnie Sussman:Another question for you, Nicole. What is the best way to fundraise post COVID and if they should attend conferences, hire third party marketer? They would like some recommendations.
Nicole Belmont:Sure. Well, first I'm going to say, of course you should hire a third party marketer. That's a great way to get exposure and meetings up. So yeah, that's definitely one Avenue. Of course, I'm going to be a proponent for that in all markets and all the market environments. But also right now, conferences are great. We participated in the funds for food conference a month or two ago, and it was amazing. They had high quality investors, I'd say they had great endowments foundations, pensions, and even those investors were taking meetings with smaller managers that you might not necessarily have gotten before. We had a manager participate.
They were about a hundred million in assets and of the 25 meetings that they got, I'd say probably 15 were with large high quality institutions. Typically those investors are looking for larger managers, but the manager through this conference was able to get the exposure. So, conferences is a great way. Investors are participating. Do your diligence on the conference, don't participate in every single one of them. Because then there could be a little bit of fatigue and overlap there, but do the ones that are most relevant for your strategy that have good investors, the type of investors that you're looking for.
Absolutely. So conferences also, the captain show groups are putting on conferences. I think they're putting on more than they ever did. They're getting well, great attendance for that. So yes, there's the paid conferences definitely look into those and also work your cabin show groups to be included in their conferences as well. Virtual webinars is a great way to stay in front of people, especially if you have something timely and informative, if there's positions that you have in the portfolio that are working really well, and you had a great month. Advertise a webinar to your distribution lists. That's a great way to stay in front of people. Also the press, speak to the different hedge fund or private equity publications, try to get some articles written about you. If there's something that you could tease out as far as some happening within your firm that somebody might want to write about. And also lastly, report to the databases.
A lot of large investors use databases for screening. So, that's another way. So just try to, as much as you can. I mean, fundraising is tough right now. It just taking a lot more time and effort to go into raising capital, but capital is being raised. So it just taking more time than ever. So those are some ways I, happy to discuss offline any more specific areas.
Bonnie Sussman:Okay. I think you've just answered the other question, but specifically somebody asks in this new environment, have any managers that you represent participated in virtual cap intro events? If so, any success making quality connections with allocations at these events?
Nicole Belmont:Absolutely. So as I said, funds for food, we had four of our managers participate. They got great meetings. It was a great conference. Managers were really happy and the money went to charity was donation based. So that was even better. We've done the context conferences, we've done some emerging manager conferences and the funds have also participated in their prime brokerage cap intro groups conferences.
So I would encourage it. And what the great thing about it is, you're not using as much time. A lot of these conferences are say over two weeks. So you could have one or two meetings a day rather than having to take a full day off and have back to back meetings. And it's also better for the investors because when they have eight meetings back to back a day, things can get blurry. It's a lot of overload.
So this way actually people are able to take their time, really digest the information and you don't have to travel. There's not as many expenses that go into. And so I would definitely encourage participating in conferences and yes, our managers have been really happy. We always ask them first if they want to participate. And it's very rare that you get to know.
Bonnie Sussman:Thank you, Nicole. Okay. So we're going to move on to a question for Amanda and Beth. Beth, why don't we start first? The question is what new trends should fund managers be aware of or consider when launching their next fund? What new trends should fund managers be aware of?
Beth Mueller:I would say the trend is towards more transparency. So, certainly when you're selecting a service provider you want to make sure that they're going to have the technology available to support the growing trend for providing transparency to your investors. And that could mean, say the helper templates.
So, which is something that we offer where it gives a detailed breakout of all of the expenses in the fund. Keeping track of these types of things can be really difficult if you don't have the right type of technology supporting it. So yes, I would say to be partnering with a service provider that has good technology that can support these growing trends.
Bonnie Sussman:Sounds like EisnerAmper. Amanda?
Amanda Nussbaum:I want to echo on transparency. I guess the other thing that I would add that I touched upon in my answer to one of the earlier questions is and I would phrase this as accountability questions. Though, getting questions about diversity in your firm and getting questions about the ESG policies. Though, and once again, it's not that necessarily. You can't change what you are. If you're not a diverse firm, you can't change that, but you need to have a plan on how you're going to deal with those types of questions.
So, I agree on the transparency and I think accountability and those are the same types of questions on the accountability side that you see across all industries, where, whoever the client is, whether it's an investor, we see it obviously on the legal side. It's being able to answer those types of questions, specifically ESG, diversity and similar questions.
Bonnie Sussman: Nicole, more questions for you. Any advice for a long short hedge fund manager, just launching with insignificant AUM?
Nicole Belmont:Great. I'd say that performance is key. Put your head down, generate performance, but I'd say initially, run your firm like it's a much larger firm. Put the infrastructure in place, whatever you're able to afford. Align yourself, we'll call it quality service providers. But just, and also position your portfolio the way that it would be at a larger number. So say you're launching with $15 million, make it that portfolio can be the same portfolio if it is your investment style, that could be repeatable at 150 million.
Because people sometimes look at your returns when you're really small and then say, "Well, you couldn't generate those returns if you were managing a lot more money because maybe the positions were either position sizing was way off or you were in microcap." So try to run the firm like an institutional firm from the get-go, with service providers, policies, procedures in place, compliance manual, and also run the portfolio, how you're going to be running it later, as long as that's possible, because people are going to look at that and they're going to want proof that you're going to be able to do the same thing that you're doing now at a much larger asset size.
And also organize the audience, certain is going to invest with you most likely at that smaller size. So the people that you're going to go into don't go to the large pensions or the large institution, sovereign wealth funds, it's more going to be family offices. It's going to be high net worth individuals. It's going to be strategic capital early adapter. So that should be your focus. So focus on the right marketing audience. And use your cap in show group.
Bonnie Sussman:Amanda, I have the last question for you. Someone is working on their first fund, it's a private equity real estate funds. He, or she asks, what should I prioritize? And what structure works best for international investors from a tax perspective.
Amanda Nussbaum:So, unfortunately, you picked the type of fund where there's really no easy answer for. Your tax structure is going to ultimately depend on what type of assets that you're investing in, whether it's more of an opportunistic strategy, whether if , you're talking about rental real estate or potentially you can use a REIT as a vehicle. But there will be, when we were talking beforehand about complexity, a lot more vehicles if you are going to be taking in foreign money, because most of the time they will want to block any type of tax filing requirement that would otherwise be applicable to gains from holding real estate.
So I think, and happy to discuss a little bit further offline, but I think you need to take into account the types of assets that the fund is investing in, who your investors are, and whether it makes sense to be developing a more complicated infrastructure for foreign investors. And that will also depend on the amount of money from that group as to whether it's worth supporting that infrastructure. But it would likely be a combination of if REITs work depending on the size of the assets, those can be expensive, and using potentially leveraged block structures.
Bonnie Sussman:Thank you, Amanda. And thank you everybody for joining our webinar. Thank you for all the great questions. We look forward to seeing you at our next webinar events. Thank you to our amazing panelists.
Beth Mueller:Thank you so much Bonnie. Thanks again for having me. And these were great questions that came in from the audience. And I just wanted to say if anyone has any questions, please, by all means, feel free to reach out Sociumllc.com, and we love working with growing fund managers and giving advice. And for no commitment until your fund launches. So by all means, use us as a resource, please.
Transcribed by Rev.com
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Ms. Sussman is a Partner in our Financial Services Group. With nearly 15 years of accounting, audit and operational experience, she provides services to private equity funds, venture capital funds, hedge funds, funds of funds and investment advisors.
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