By Diane Harrison
After attending a recent conference where experts discussed prevalent issues family offices struggle with in terms of their investment management activities, it struck me that there is a certain disconnect in the communications aimed towards and emanating from these family offices. The number of family offices in the United States is roughly the same as the number of emerging managers looking to family offices for investments, and that current figure is in the thousands. Why then are these managers finding the prospects for placement of their funds so very difficult to achieve? Perhaps the main reason is in the interest level disparity between the two: emerging managers are eager to explain their strategy and ability to offer non correlated returns, while family offices seem not all that interested in learning about or evaluating these investments as a dedicated practice.
A COMMUNICATION GAP IN NEED OF A BRIDGE
Family offices’ primary motivation is typically to safeguard capital and minimize risk, and they are not easily swayed or influenced by what motivates the managers excited to prove their investment mettle and expertise. But since emerging managers with assets under management well below $1B and a track record of 3 years or less essentially cannot penetrate the institutional investor community with any real success, these managers need to find a way to reach the family office community. This outreach should prioritize creating a desire within family offices to learn about and to make investment forays into alternative funds.
The ability to form relationships and establish trust with the gatekeepers, advisors, and family office members themselves is critical to beginning this process. Getting a family office gatekeeper or family member to return a phone call or agree to review fund materials is often a Herculean effort for managers. Because any time spent in communicating with a family office is both rare and precious, emerging managers cannot afford to squander such time by failing to understand what each family office is saying about their particular level of receptivity to the investment opportunity a manager brings.
LOST IN TRANSLATION
In an effort to help decode the meanings behind the messages expressed by family offices, the following sampling offers some of the more common misperceptions that managers have when faced with a family office’s objections to alternatives.
WHAT THEY SAY: I’m not looking for new managers to add to our portfolio
WHAT THEY MEAN: I’m not equipped to evaluate new managers and don’t want to say that
Managers tend to forget that the burden of clear communication is on them, and not the family office, to translate the meeting dialogue. In order to establish new relationships with family offices, who tend to close down the initial forays of emerging managers with this “I’m not interested” brush back, managers might begin their outreach efforts with the advisors serving family office clients. Advisors who are educated on their offering and suitability can initiate an introduction to potential family offices that will carry much more weight when beginning to build a relationship with new managers.
WHAT THEY SAY: I’m not looking for investments in the XYZ sector right now
WHAT THEY MEAN: I don’t understand what is different about what you do and why it can help me
Failure to be clear on why this approach offers better return/greater downside protection/deeper market penetration into a particular sector/access to breakthrough developments/etc. is tantamount to failing to say really anything interesting to a potential investor. With thousands of managers offering alternative investments, and an already-established lack of desire on the part of family offices to uncover the hidden gems in each sector, the burden to be immediately distinctive always rests squarely on the manager to establish.
WHAT THEY SAY: I don’t want to invest in any more hedge fund/private equity funds
WHAT THEY MEAN: My accountant says I shouldn’t add any more K-1s to my filings
Paperwork, especially late-filing, tax-related paperwork, is never attractive to investors. While regulatory requirements might require these forms, managers who can offer flexible programs that don’t require such paperwork in order to attract new investors should be touting this feature as part of their marketing campaign.
WHAT THEY SAY: I like to have control over my money
WHAT THEY MEAN: Your fund structure is not interesting to me. If I invest in you, I want a separate account
The era of “just say no” to separate account requests is over for emerging managers. Increased competition for high net worth clients, family offices, and smaller institutions means that the evolution of investment options has added many more programs, including liquid alternative funds, tailored towards smaller investors entering alternatives. Managers who want to stay in the game for these investors will strongly consider offering a separate account format to grow assets under management as they also seek to grow their fund.
WHAT THEY SAY : I don’t think your approach suits our objectives
WHAT THEY MEAN: I’m not clear on how exactly you contain the downside risk in your strategy
Explaining the risk management process, and most importantly, how to limit the downside, is more essential in winning family office money than showcasing upside potential. With the “stay rich” perspective most often dominant as a family office long-term investment objective, being able to articulate how risks are identified, quantified, and managed prudently is a crucial early discussion subject for managers to master. This should not be a general narrative; specific examples, distinctive adjectives, and clear phrasing that applies specifically to the strategy approach is welcome and necessary in convincing risk-adverse investors that a particular management approach to containment is thorough and expert. Managers should devote a serious level of attention to this area and practice the delivery of description to get comfortable with talking about risk and conveying conviction to the process.
WHAT THEY SAY: We only look at investments that have a certain size
WHAT THEY MEAN: You aren’t big enough to make us feel comfortable in giving you money
Common frustrations for managers building their business, operational risks are nonetheless a valid concern for any investor. The alternatives industry has developed many options to help manage this hurdle, including seeders who provide both a level of scale and access to investors with a higher tolerance for early-stage managers, strategic outsourcing of expertise in many areas required by fund managers of all sizes, liquid alternative products that provide lower entry points and easy exits for investors desiring more control over liquidity, and a growing number of managers who are offering separate accounts and, potentially, founders share classes to entice early investors into a fund. Managers who are experiencing difficulty in getting past this investor objection can avail themselves of the industry’s many options to mitigate these risks and lessen the objections to their offering.
WHAT THEY SAY: We’ll review your information and let you know
WHAT THEY MEAN: You haven’t adequately made a persuasive case for keeping the dialogue going so aren’t likely to hear back anything affirmative
Too many managers fail to hear this statement for what it generally means, which is essentially, “don’t call us, and we won’t be calling you.” The marketing pitch hasn’t been convincing enough to continue the dialogue with these investors, and while the sale may not be salvageable, there is valuable information to be gleaned from a debrief discussion with the family office advisor or investment representative, if they are willing to share feedback. Good salespeople know that a non-close outcome can still offer an opportunity to learn what went wrong, so that mistakes or weaknesses in the approach can be altered for the future. As is often the case, listening is ultimately more important than speaking.
Diane Harrison is principal and owner of Panegyric Marketing, a strategic marketing communications firm founded in 2002 and specializing in a wide range of writing services within the alternative assets sector. She has over 20 years’ of expertise in hedge fund marketing, investor relations, sales collateral, and a variety of thought leadership deliverables. In 2015, Panegyric Marketing received AI’s awards for Best Financial Services Marketing & Communications Firm, Innovation in Asset Strategy, and Business Excellence in Strategy & Positioning Statements – USA as well as M&A’s Excellence in Financial Services Marketing – USA, and Best Financial Marketing Firm – USA. The firm also won consecutive year awards in 2013-14 as IHFA’s Innovative Marketing Firm of the Year and AI’s Marketing Communications Firm of the Year- USA. A published author and speaker, Ms. Harrison’s work has appeared in many industry publications, both in print and on-line.