By Diane Harrison
A universal theme in alternative assets is investor money looking for a place to land. Uncommitted cash, underperforming assets, and professional laggards throughout the alternative channels all contribute to a common investor desire to find purposeful options to meet their objectives. It should be a marketer’s dream: money wanting to be placed and hungry managers actively seeking new investor partners. So why is the connection missing between the two?
So Much Water Yet So Little To Drink
Investors are clearly voicing their desire for smaller managers who can provide returns that outpace the lackluster performance of the alternatives industry establishment. Northern Trust’s recent Wealth in America Survey (2012) profiled 1,700 wealthy households across the U.S. to understand what is important to them. Some of the key findings included that 63% are willing to take a calculated risk, 52% are always looking for a new investment, and 30% are now more likely to seek out alternatives than they were five years ago.
Smaller managers lacking in-house marketing talent seek sales representation that will connect them to these HNW investors. Ask emerging managers across the strategy spectrum what one of the hardest things to manage in their business is and they will agree: “Getting in front of the right investors” is a top challenge.
So the question remains: where are all the sales people ready to connect emerging managers with investors eager to place their money in alternatives? Are there not enough of these marketers? Are alternatives marketers not incentivized to meet the needs of the market? Several of the issues that seem to interfere with third party marketing of emerging managers follow.
I’m Not Big Enough To Play, Or Do You Mean I’m Not Big Enough To Warrant Your Effort?
An obvious challenge for smaller managers is the size of their business and the relative risk that may pose to some investors. Scale for both managing money and placing money clearly factors into the decision of both marketers looking to place investors’ money as well as managers having the operational capacity to accommodate investment inflows while preserving performance.
Many emerging managers turned down for third party marketing representation are told that, until their AUM is of sufficient size, they cannot be put in front of investors. While this is often true, certainly so in the case of most institutional investors, there exists a large strata of HNW and smaller institutional investors with both a desire and an investment mandate to invest with smaller alternatives managers who are suitable and attractive from their objective standpoint.
These investors are often at the front end of their alternatives learning curve and require more sourcing, educating, and relationship-building than the long-standing institutional clients many third party marketers carry in their relationship base. Quite frankly, it takes more work on the part of marketers to develop and ultimately match these HNW and smaller institutional investors with appropriate alternative managers. Additionally, the sales ticket will likely be substantially smaller per each successful matching. The amount of marketing work to add an investor is comparatively the same when seeking $100,000 as $1,000,000, but the payoff is one tenth.
Despite the end result to both parties, that being a successful marriage of investor and manager, the third party marketer may be reluctant to put in the work that is required on these smaller sales. Nevertheless, a marketing opportunity exists for substantial growth of these investors into alternatives, and the shortfall seems to lie in the third party resources capable? or willing? to match managers with these investors.
Past Performance Is Not Necessarily Indicative Of Future Performance, but It Is The Best Predictor
Another one of the frustrating push backs heard by emerging managers from third party marketers is that, while their performance looks good on the relatively small amount of capital with which they founded their business, it might be difficult to convince an outside investor to join the fund as a significant portion of the capital base because of doubt the manager can ‘handle it.’ This argument is often a smoke screen for a reluctance to ramp the manager up in AUM with small and frequent inflows of HNW capital that adds to the outside capital mix in increments of $100,000 or $200,000 at a time, rather than inflows that come in the form of millions.
The reality is that, for most managers who have a strategy deployed in markets with plentiful liquidity and capacity, such as equities or commodities, there is little risk of degradation of performance based on a rise in the fund’s capital base. This is not to imply that degradation of performance cannot happen as a manager grows the asset base, but the reasons are often due to operational challenges, investment personnel gaps, lack of business management planning, and other non-investment related issues. With small steady inflows of outside capital, an emerging manager can establish a track record of ‘handling’ the larger AUM with consistency and undiluted performance attributed to the size of the fund.
Third party marketers should be highly skilled at and focused on describing the manager’s strategy and business development plans for scaling growth at the earliest stages of discussions with prospects. This is one of the fundamental reasons that the sales process takes more time than it did a decade ago. The truth is that investors require more details, data, and discussion at every point in the sales process to gain confidence in their evaluation and decision process for each new investment they seek.
I’d Like To Work With You, But Your Strategy Is Not A Top Interest To Investors Right Now
HNW investors are universally interested in diversification and risk modification. They are eager to learn about ways to preserve and protect their money so that they can execute legacy planning and maintain long-term philanthropic interests. They are motivated overwhelmingly by establishing trust and integrity in the relationships they build with their financial partners, both advisors and providers. They are looking for advice and value-added service that will help them position themselves more defensively against tail-risk events that potentially could derail years of conservative planning and execution.
On the alternatives side, they are not typically focused on following trends in strategies or identifying the best stock picker in the markets. Their interest in alternatives centers on owning something that is different from their equities and fixed income holdings; they want insurance against more of the sameness by which they feel their portfolio is already threatened. This means that marketers selling alternatives to these HNW investors should be focused on describing and illustrating how alternatives can achieve this diversification and risk modification and not on short-term performance comparisons.
There are many alternatives avenues to achieving these goals and strategies across the market spectrum that can create this form of non correlation. The market is currently being populated by a variety of ‘liquid alternatives’ products that provide transparency and liquidity for investors to satisfy the need for access to capital while still allowing for a range of strategies to achieve diversified investment objectives.
Marketers who refuse to work with managers based on the fact that their strategy would be hard to sell because it’s not ‘in favor right now’ with investors are looking for a short cut to sales closings. They are relying on popular trends to do the initial work of getting investors to pay attention to a strategy or approach that allows them to cut the time it takes to make a sale.
No One Ever Said It Wasn’t Hard Work
Trend selling, whether in alternatives or in traditional markets, is also counter-intuitive: what is hot eventually cools and a relationship based on the short-term is exposed to disappointment and a misalignment of expectations that can lead to a termination of the relationship as trends shift. A commitment built on alignment of investor/manager goals within a strategy, a clear understanding of how the strategy is expected to perform under a variety of market conditions, and an ongoing dialogue about the progress and status of the fund’s performance is a more resilient relationship that can span many market cycles.
It should be incumbent upon third party marketers to foster more of these committed relationships within the HNW community because they serve both the investors and the managers who need each other. There really isn’t a shortcut to this process. These investors will always need portfolio options that improve diversification and reduce risk exposures. Emerging managers require a larger capital base to grow.
Dedication to the relationship process and a true exchange of goals and objectives is critical to gaining access to the HNW investor base. This segment of the investment community is essential to emerging managers becoming successful as a business. Marketing talent is crucial to the process, and third party alternatives marketers would be well served in recognizing the underserved needs of both HNW investors and emerging managers who together form this mutual relationship.
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.
A published author and speaker, Ms. Harrison’s work has appeared in many industry publications, both in print and on-line. Contact: firstname.lastname@example.org or visit www.panegyricmarketing.com.