The Small-Cap Advantage by Brian Bares

Author:Brian Bares
Format: epub
ISBN: 9780470939697
Publisher: John Wiley & Sons, Inc.
Published: 2011-01-13T16:00:00+00:00

CHAPTER 5

The Fund-Raising Process

This chapter introduces aspiring managers to the different types of institutional clients they may encounter when fund-raising. The evolution of the modern endowment model, an approach that embraces uncorrelated specialist managers, is discussed to give managers a better understanding of how they potentially fit into an institutional portfolio. Small-cap managers lacking a significant asset base or track record may experience greater success by restricting their marketing efforts to certain client categories, and strategies to identify and engage with these are introduced. The chapter concludes with a discussion of the most common impediment to successful fund-raising for a small-cap manager—an existing institutional asset base.

GENERAL MARKETING STRATEGY

Small-cap managers need their capital base to generate enough recurring revenue to exceed their firm’s breakeven level to sustainably operate their business. Ongoing expenses like registration, compliance, systems, outside advisers, and personnel are usually funded from recurring management fee revenue. Some aspiring managers are lucky enough to have a large initial investor whose fees can cover most or all of these costs. Other managers break away from larger firms with seed capital, or they sell equity in their firm to finance initial operations. In any case, newer managers invariably encounter difficulty in their institutional fund-raising efforts if expenses are not amply covered by revenue, since many potential clients view a revenue and expense mismatch as a roadblock for investment. Some institutions have rules preventing investment if their funding represents too large a percentage of the manager’s total capital base (typically 10 to 25 percent). Structural impediments like these can be difficult and time consuming for a manager to overcome, and attempts to surmount them draw attention from value-added research and portfolio management.

The manager of a newly launched firm quickly comes to the realization that fund-raising is a necessary and important part of running the management company. Since the vast majority of managers do not have the luxury of running internal capital exclusively, they must spend time courting and nurturing client relationships. Aspiring managers get the most out of their fund-raising efforts when they have properly educated themselves on their institutional prospects. Some institutions are more likely to invest with managers early in their life cycle, and others limit themselves to funding tenured managers with long track records. Each institution has a slightly different list of philosophy and process traits that they look for in a manager. Matching up on a number of these characteristics can mean a leg up for managers seeking funding. Foundations, endowments, cutting-edge consulting firms, and specialist emerging-manager funds are apt to have experience placing money with new managers. These, along with high-net-worth individuals and family offices, are the most appropriate fund-raising channels for the manager starting from scratch. More experienced managers starting with a larger base of assets can pursue traditional consulting firms and their more conservative pension plan clients without worrying about immediate disqualification based on rudimentary criteria.

Institutional clients expect professional management, and they want value for the fees they pay. Before embarking on an institutional fund-raising effort,

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