Capital Call – Mastering 7 Essential Investor Questions

DHarrisonheadshotBy Diane Harrison

Although it’s early in 2015, investment managers are already feeling the pinch of making as many potential investor short lists as possible this year. One of the key hurdles all managers face is the investor interview, when the focus is not on the fund or strategy, but on the manager’s ability to sell him or herself. While managers are typically comfortable discussing their investment thesis and related activities, they are markedly less able to articulate the personal and intangible details about which investors want to learn more.

THE GOOD, THE BAD, AND THE UGLY

Investors are less likely to pull the trigger on a new investment without getting a real feel for what makes the manager tick and grow the fund’s business. The questions investors invariably ask stem from a desire to get underneath a portfolio manager’s professional training and performance skills to uncover what fundamentally drives the manager and defines the manager’s decision-making process. Most investors are looking for a relatively long-term fit to their investment universe of managers. They aren’t interested in dipping in and out of investments, or managers, every few months. The due diligence process undertaken by investors is to ensure an investment fit that includes a level of comfort with both strategy and manager alike.

Managers need to be prepared to discuss themselves and reveal more interpersonal qualities than previously expected if they want to end up at the top of the investor shortlist. What follows are some of the key decision-making issues managers must successfully address before they can hope to persuade a new investor to their offering. While the questions are essentially universal, the answers must be individual. There are no right answers, but each manager’s responses must be authentic to lead to a successful outcome.

1: Tell me about yourself.

This is not a request for a verbal recitation of a resume. Investors are looking to learn about a manager’s internal orientation towards their work: perceptiveness, commitment, situational awareness, and grounding. Managers should avoid answering this question with pedigree and performance criteria. Rather, consider revealing some thoughtful responses that will provide more of the interpersonal picture investors are attempting to uncover.

2: Who are your advisers or mentors and what value have they given you?

This question also is geared towards learning how a manager has grown over time. Equally important in believing the manager knows how to do a great many things well is the conviction that a smart partner acknowledges there is always more to learn. What traits have been important to develop? Whose skills does the manager value and seek to emulate in the business? If the business is a start up or spin-out, how influential are these advisors or mentors in the growth and development of it? If the advisor/mentor mix is strong, it can support the investor’s decision to take on the enterprise risk of a new company. If a manager hasn’t assembled any advisors or mentors, perhaps the manager should consider doing so.

3: How do you propose to cover the outside skills you need but currently lack?

This is another way for investors to ask about the manager’s outsource plan and network of resources. Beyond the essential third-party service providers for fund administration and regulatory needs, how will the manager supplement the asset-raising, investor relations, marketing, information technology, and accounting functions, among others? Investors are concerned in this area with two main elements: the manager’s forward-thinking business development process, and the manager’s ability to fund the plan through its phases. Even if most of the plan is dependent upon hitting certain growth milestones, those managers who have thought through the process and are able to answer the question with focus are well ahead of their unprepared peers.

4: How do you plan to invest your operating capital to make the fund stronger?

This can be a follow-on question to the previous one, with an investor’s desire to dive deeper into the manager’s action steps behind the business plan. The discussion is also separate from the plan for investment activity. Again, investors want to discuss how a manager has positioned the company for sustainable growth: What will trigger key hires? What will the migration plan be to bring outsourced functions internally? Is there enough funding in place to weather a dry spell in growth of assets? A manager who blurs the lines between operating capital and investment capital in addressing this question is going to fall short in the investor’s eyes.

5: What was a good decision/bad decision?

Most managers have faced this question multiple times in their career. In both the good decision/bad decision reply, the more successful answers center on specific illustrations that present an issue, the manager’s choice of responses, the selected option, and its resultant outcome. In the case of the bad decision example, adding a ‘lesson learned’ explanation is useful, as well as a subsequent example of when a similar issue presented and the different response and result that ensued. It’s surprising how often investors find a manager unprepared to address this straightforward question with personal details.

6: Why should I invest with you?

This isn’t an argumentative challenge. Investors are assessing how much a manager wants their business relationship, and basing their decision to move forward on three key factors. First, the investor will be evaluating a manager on the ability to persuade them with the potential to join a dynamic business. Second, they need to be convinced that the anticipated results are based on demonstrated performance, either within the current offering or derived from similar earlier investment management roles. And third, the investor is looking to see if the manager has the endurance to build a business and execute on a strategy simultaneously.

7: Can I talk to three people who have invested with you before?

If an investor asks this question many things have gone right to this point. This is the ultimate reference check on an individual’s reputation as a professional investment manager. Be prepared to share these contacts, as someone who asks for this is seriously considering investing and wants some first-hand verification that managers can do what they say they can do. A manager lucky enough to be in this position should think about these reference contacts well in advance, which should not include the ‘family and friends’ network if possible. Including a reference contact that may have ridden their investment down at some point, but ultimately profited from the relationship, is a smart and strategic choice. Perseverance and the ability to stay the course are qualities prized by both investors and managers. These attributes often form the strongest basis of a mutually satisfying relationship moving forward.

STRIP IT DOWN TO STEP IT UP

The face time with a prospective investor is one of the most critical stages in asset-raising. Managers who are prepared to demonstrate transparency and thoughtful introspection about the non-investment attributes of their business will make a much stronger impression on these investors. And while past performance is no guarantee of future results, when it comes to choosing new managers, it’s clear that investors value introspection as a marker for future success.

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. Panegyric Marketing received consecutive year awards in 2013-14 as IHFA’s Innovative Marketing Firm of the Year and AI’s Marketing Communications Firm of the Year- US. A published author and speaker, Ms. Harrison’s work has appeared in many industry publications, both in print and on-line.

Contact: dharrison@panegyricmarketing.com or visit www.panegyricmarketing.com.

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