AUM is Critical for Emerging Managers:
There are few things more important to the credibility of a team launching a first- or second-time fund than getting to a respectable AUM. Young firms can survive average performance with a respectable AUM, but will struggle to survive without it, even with superior performance. If AUM is too low, committed or “on the fence” investors may begin to wonder what they are missing. Why is no one else investing? The successful management of a small AUM may still leave the investor wondering if the manager’s process and strategy are scalable. Additionally, investors may begin to suspect whether the manager is making enough money to cover the overhead required to feed a high-performance team and infrastructure.
Underestimating the Challenge of Capital Raising:
So, why do so many asset managers fail to invest in perhaps the most important aspect of their firm: the capital raise? Is it because managers underestimate the challenge ahead? Managers who read industry reports from the likes of PitchBook, Preqin, and others will see that investors allocated $35.5 billion to venture capital and $186 billion to private equity in 2015 alone. Seeing these staggering statistics may lead managers to believe achieving a meager $100 mm to $200 mm AUM goal will be a quick and painless experience. What we know is that a successful campaign demands attention, requires time and must have a focused investment of intellect and capital.
Statistics Misleading for Emerging Managers:
Research shows that a large portion of investor allocations are to second, third, and fourth generation managers, as well as $1B+ funds. For example, in private equity, seven funds received a total of $57.7 billion in 2015. On the flip side, of the $35.5 billion allocated to venture capital funds, only $1.3 billion or 3.65% of the total allocated was to first-time funds. There were 20 first-time venture capital funds closed in 2015, which equates to an average of $65 MM per fund.
In the ongoing quest for alpha, the growing gross allocation to alternative investments indicates a continued expansion in interest among LPs. PitchBook reports that venture capital, with $10 billion raised in the 1st quarter 2016, experienced one of the strongest quarters in recent memory. In Q1 2016, private equity allocations increased 14% compared to same quarter the year before. PitchBook research also suggests investors continue to have an appetite for first-time managers, especially to those representing unique and repeatable strategies. But, with all this positive news, fundraising timelines continue to extend. PitchBook reported the average PE fund closing time in 2016 surpassed 17 months, while Preqin says that 26% of funds are taking more than 24 months to close, showcasing the challenge facing alternative asset managers.
- Allocations to alternative investments continue to grow at unprecedented levels;
- LPs’ recognition and interest in emerging managers is also increasing in record fashion;
- $1.3 billion of venture capital raised in 2015 went to first-time fund managers;
- The average fund closing time for private equity increased to more than 17 months, with 26% of funds taking upwards of 24 months or greater to close;
- Funds raising capital beyond a year with little AUM can end up with irreparable brand damage with prospective investors.
Simply put, if a manager is trying to build a firm recognized for greatness, the approach to the initial fundraising efforts should not be underestimated or short-changed. Making a good first impression with investors is paramount, even if they choose not to invest, as these prospects will form a lasting impression. Like it or not, these prospects will manage a great deal of the word-of-mouth marketing of the firm.
To keep a campaign fresh and compelling, fund managers should develop a professional marketing and distribution strategy capable of eloquently and consistently sharing a story to a well-targeted audience of allocators with a proven appetite for the offered strategy. A well-researched and focused effort on the front end of a raise will help accomplish this mission.
Choosing not to invest the capital, or dedicating the resources (going it alone without a dedicated internal team or professional marketing group) to properly achieve AUM goals will be evident to the investment community and will often result in a hard to overcome, poor first impression with investors.
Our advice: Dedicate the proper time and resources to make the right first impression. It will have a significant impact on current efforts, as well as on future funds.