By Diane Harrison
Spring represents a fresh opportunity for investors and fund managers to have meaningful discussions about each other’s needs and solutions. Both parties want to arrive at congruence; sadly, the getting there often brings conversational hiccups and missed opportunities.
Managers new to the business of talking to investors (read: managers who have spent 99.99% of their time managing money, and 0% of their time selling their talents to new investors) find themselves unfamiliar with the process of discussing their abilities from the perspective of someone outside their world, but interested in learning. Framing the capital “ask” conversation is vital to a new manager’s success, yet is too often an opportunity lost, as managers bog a conversation down in the myriad of technical investment details that they find themselves most comfortable describing.
Let’s reset that capital raising “ask” scenario to give promising fund managers a better opportunity to engage investors successfully and land some of that ready alternative investment capital looking for a new home.
THE ALTERNATIVES TREE IS RIPE FOR PICKING
2019 indications are that capital is receptive to alternative assets, and that funds can win over investors looking for relief from traditional market oversaturation. According to Preqin’s 2019 Global Alternatives Report:
- The firm predicts that hedge fund industry AUM will grow by 31% in the next five years, reaching $4.7tn by 2023, as investors’ requirements for alpha uncorrelated to public markets continue to push them towards hedge funds;
- With nearly 15,000 funds open to investment, navigating the saturated landscape and performing due diligence to construct a portfolio is no mean feat; and
- One in every three fund managers now provides a managed account offering and, over the next five years, 39% of fund managers expect managed account offerings to increase as appetite for the structure shows no sign of abating.
A TALE OF TWO PITCHES
Typically, there are two major tasks for a new manager to tackle when starting up a new fund business: securing start up capital, and securing capital to manage. Both require talking with investors, and both require a sales pitch to convince them of the value, but these two discussions are not the same. This bears repeating: pitching investors on a business and pitching investors for capital that will be run in a new fund business are two separate pitches. Arguably, both types of pitches should be as concise and clearly defined as possible, but the content emphasized in each is very different. Let’s look at what should be the focus of a business pitch to gain start up capital first.
START-UP CAPITAL PITCH ESSENTIAL COMPONENTS
- WHY ARE YOU DOING THIS? Have a clear vision of your rationale for setting up the business. This includes the value proposition to your investor. Why should they be excited to back you? What will they get from being affiliated with your endeavor? It’s not really about why you want to do something: it’s why they should want to be a part of it.
- MARKET OPPORTUNITY. Define the market opportunity and size or scalability of this need. If you can’t define a problem and why the current solutions aren’t as good as your proposed answer, you shouldn’t be building that solution.
- HARD DATA. If you use assumptions in your presentation, support them with facts. Don’t use vague statements such as “there is a tremendous need for such and such…” as these statements are meaningless, not measurable, and make you sound unprepared and inexperienced.
- KNOW THE LANDSCAPE. Be prepared to defend your competitive advantage. Don’t pretend there’s no competition. If you claim to be the only one providing a particular answer, you look naïve. Address those businesses or solutions that are currently solving a similar problem, if not exactly the same, to demonstrate your knowledge of the competitive landscape and your ability to sustain an advantage over them.
- USE OF THE FUNDS. Have a clear explanation ready for articulating how much money you need to start up, and how this will be employed from Day 1. What will be the use of the capital? Is there going to be a need for a second round of financing, and if so, when? Create a schedule of assumptions, development points, and timeline projections that support the need for the funds being solicited.
- KNOW THE RISKS. Address the various forms of risk the new business faces. Are there legal or regulatory changes on the horizon that may impact the growth? Does there need to be intellectual property secured for any proprietary process or offering? Are there other forms of liability risks involved? Not mentioning these to a savvy financial investor only makes you seem unable or unwilling to proactively face such issues and take steps to overcome them.
- DEFINE THE EXIT STRATEGY. Most importantly, have a clear exit strategy monetized and spelled out in advance for the start up investor. No serious investor in start up businesses will give money without a good sense of what return will be on their investment and when they’ll see it. It’s perfectly fine to have a schedule of assumptions for this exit monetization based on assumptions made and hurdles met, but serious thought has to be given to how the funds will be put to work and extracted for value before asking an investor to hand them over.
THE SALES PITCH FOR CAPITAL: KEEPING IT SIMPLE
If you’re fortunate enough to win an investor or investors with your business pitch and obtain start-up capital, now you can move into defining your sales pitch to sell the business of your fund to prospective investor partners. While this pitch will also contain some of the same elements of information used in the business pitch, such as the market opportunity, the competitive landscape, and your suitability for creating and running this fund strategy, the format and the conversational thread of the sales pitch is different from the business pitch. Here are three tips on helping to create a more compelling fund pitch for new managers.
- TELL A STORY. Creating a new fund business means telling a compelling story. Too often, data-driven investment professionals crank out 20-30 slides of charts, graphs, analyses, and summary tables and believe the sheer weight of such numbers will together coalesce for investors into a powerful argument. I’m so smart, how can you not want to put your money with me? Investors don’t think that way. The sales pitch should weave the story of what you have, why it works, and how they can benefit from affiliating with it in a smooth sequence of 12-20 pages.
- CUT THE CLUTTER. In addition to not just linking data slide after data slide in a disjointed way, the fund pitch should be pared down to read as simply as possible while still articulating differentiation. The storyline for an investor to follow needs to provide just enough details to convince them to find out more from the manager and his team about the fund, its processes, and the people behind it.
- WRITE THE END FIRST. To ensure that your fund pitch covers all the points you need to, write the executive summary first. Then develop your pitch to support it. Don’t forget to include defining the team that will be in place Day 1, the forecasted plans to add to that team, and why these roles are essential to the launching and growth of the business. That doesn’t mean a host of roles and responsibilities can’t be filled by third-party service providers of specialized skill, but the business needs to be planned out to be more than one individual running an empire…of one.
There is no question, both types of pitches—asking for capital to build a business and asking for the capital to manage that builds a business founded on running capital— are tools fund managers must have. Understanding the role each of these pitches performs when addressing investors is vital to landing both the start up funding needed and the AUM so highly prized by new managers of all kinds.
Diane Harrison is principal and owner of Panegyric Marketing, a strategic marketing communications firm founded in 2002 specializing in alternative assets.