A recent survey by Preqin revealed that 60 per cent of hedge funds have less than USD100 million in AUM and that only five per cent of hedge fund flows go to funds operating below that AUM level.
There are now approximately 15,000 hedge funds in the industry, meaning investors are being bombarded by different funds every single day and thousands over the course of a year. They probably meet with 200 or so, engage in follow-up meetings with around 40 and allocate to two or three.
As such, there is one certainty that start-up managers can be sure of when launching their new fund: the ability to raise capital is exceptionally difficult and competitive. The same applies to private equity and real estate, where asset raising can take up to two years for smaller and emerging managers.
But there are different channels available to support marketing and distribution. In Europe, an increasing number of bank-owned and independent fund platforms are emerging to host funds and provide active and passive distribution support, whilst placement agents and distribution partners can prove highly effective at introducing managers to the right investors.
"It's important that start-ups know their target audience; who are they aiming the fund at? Which core markets will they distribute in to? Will they be using a hosted solution and/or a third party marketing firm? These considerations should be tailored to the marketability of the product.
"Our advice to clients is, ‘Where using a hosting platform solution, look at what legal control you have to give up versus setting up a standalone fund product. Establish what the process is and what fees you will be charged to come off the platform at some later point. Consider whether coming off the platform may create a taxable investor for your investors.
"There is no single solution that fits every manager, for every investor type, in every EU jurisdiction. It will tend to be a combination of solutions based on the preferences of the target investors," outlines Donnacha O'Connor, Partner at law firm Dillon Eustace.
Zurich-headquartered ACOLIN Fund Services AG provides independent representation and distribution network management capabilities to managers, both EU and non-EU, who need to understand how the European market works and who might be the best distribution partner(s) to work with.
ACOLIN will help managers get their funds into different markets by advising on fund registration and distribution strategy, provide notifications to the relevant authorities when privately placing funds into different EU markets, as well as act as the legal representative to funds for distribution to qualified and/or non-qualified investors into Switzerland.
"The most important thing for an asset manager to understand is that setting up the fund is not enough. If you have a European AIF with a European AIFM, you still need to have a well-defined distribution network. We have a well-established network where we take on our clients' data, contract and commission management, and if needed, fund document dissemination. We handle everything so that if an asset manager wants to privately place their fund into a particular country, he can approach investors without spending time on compliance and legal issues," explains Viktor Fischer, Managing Director, ACOLIN Fund Services AG.
Having that helping hand can be a huge benefit to new managers as it can take years of book building to develop a robust investor network. To clarify, firms like ACOLIN do not physically introduce managers to investors. They merely advise.
"We have a client relationship management team taking care and supporting more than 180 asset manager clients. We also provide our clients with a platform called ACOLIN connect.
"The platform allows the manager to strengthen his brand and reach a wide network of potential investors. It gives distributors and investors the chance get detailed information about asset managers; it allows asset managers and investors to 'meet' virtually," says Fischer.
Campbell Lutyens is a private placement agent and secondary sales advisor that specialises in raising institutional capital for illiquid strategies – private equity, infrastructure and credit strategies.
Last year it raised approximately USD15bn for its global manager client base.
According to Penny Walker, General Counsel at Campbell Lutyens, any new manager that is looking to partner with a placement agent should do so as quickly as possibly – ideally at the pre-launch fund phase. This will allow the placement agent to help with market message consistency, help with presentation materials, provide coaching on presentation delivery; basically anything that will make the manager fully prepared to approach the investor market.
"Investors will absolutely make a decision based on the quality of the presentation materials so they have to be professionally produced," says Walker, adding: "We would always advise managers to have a very targeted approach to investors. Know who your investors are and what they want to invest in."
Walker offers the following advice on how to develop an effective approach to raising assets and building a manager's brand reputation: "For first-time managers, it is vital to try and secure cornerstone investors. You're not going to get a first-time fund off the ground unless you've got a backer. If they can give you seed capital, this could be used to make investments and build an early track record.
"Get the timing right. You don't want to launch too early because you might find that during the first round of fund raising your fund lingers in the market. That can reduce momentum in the fund raising process.
"Lots of good news is great for fund raising so communicate any successful exits, updates in the deal pipeline, the track record, etc. Finally, if you can create scarcity around the fund raising process – i.e. if investors don't allocate now they might miss out – that can also be an effective tool within the marketing strategy."
Praveen Joynathsing (pictured) is Director, Hedge Fund Selection, Lyxor Asset Management. Lyxor currently runs three platforms to provide institutional investors with access to best-in-class managers: an offshore hedge fund platform in Jersey, a UCITS platform in Ireland and an AIFMD platform in Luxembourg. Both the UCITS and AIFMD platforms each have seven funds at the time of writing.
Getting on to a platform such as Lyxor's gives managers the opportunity to potentially build significant assets across a wide range of institutional investors and whilst Lyxor will typically look at established managers it also supports emerging managers that it feels offer a compelling investment opportunity.
Like Walker, Joynathsing says that attracting seed capital is a good way to kick-start a business but the disadvantage to doing this is that managers give up part of their equity; a revenue share might run for a number of years. Another route available to start-ups who have spun out of existing fund management groups is to tap in to investors that they previously dealt with. However, there will often be a non-compete clause for two years so this is not an immediate option.
The third way to raise assets is to do it internally, which these days is getting harder and harder.
"You need to have the right strategy that appeals to investors," says Joynathsing. "You've got to get to a critical mass as quickly as possible. If your fund languishes around the USD25 million mark for a number of years, it becomes very difficult to generate investor interest. It is best to try and launch when a particular strategy is in vogue, although this is hard to achieve in practice. It is becoming increasingly common for managers to offer a heavily discounted founders' share class at launch to reach a critical AUM quickly."
He says that at Lyxor, the level of a manager's AUM is a key criterion; USD100 million will often be the minimal amount although they have invested in smaller managers.
"If we write a ticket for USD25 million to invest in a manager, we don't want to put the business at risk when we pull out that capital at a later date.
"In terms of length of track record, we look for three years but we will also consider an audited track record from the manager's previous organisation. We've seeded funds before based on their prior track record.
"Finally, we would consider the operational set-up; who are the service providers and what are the systems, the risk management processes in place? Do they stand up to institutional scrutiny?" says Joynathsing.
In Ireland, DMS Offshore Investment Services (Europe) Limited is able to support fund managers with both an AIFM platform (DMS AIF Management Company) and an AIF platform for fund distribution. Indeed, it operates both an AIF and UCITS platform to support approximately 50 funds across Ireland and Luxembourg.
Speaking about distribution, Conor MacGuinness, Director at DMS Offshore Investment Services, says that the firm approaches this from two angles. Firstly, soft guidance on marketing based on the experiences it has seen other managers go through.
"Secondly, we help in terms of the legal structure; that is, understanding what structure we think is going to work best, in which domicile, that will help the manager market their fund and grow the assets as much as possible.
"We do work with placement agents, and this has proven successful in the past, but not all managers will want to go down this route. Additionally, the investor conversation for significant allocations can often be a lengthy one before subscriptions are received. For example, one fund launch we are working with currently is based on an allocation from a pension fund. In this case, the manager had been talking to them for four years," comments MacGuinness.
Fischer makes the point that in Europe, some markets are more open to emerging alternative fund managers than others. Before approaching bank-owned platforms, which will have sophisticated institutional investor networks, Fischer says it can be beneficial for asset managers to approach independent financial advisors, family offices etc., in a few key markets as opposed to trying to convince pension fund investors from the outset.
"I would recommend start-ups to focus their marketing strategy on countries like the Nordics, UK and Switzerland, and to reach out to smaller investors.
"There is definitely demand in Europe for alternative investments but it's always a question of how the manager presents his strategy. The bottom line is you have to prove the quality of the fund; good governance, proven track record, robust risk management process etc. Credibility is always the hardest thing to prove for any start-up manager," concludes Fischer
