Changing industry dynamics
By A Paris – The shift to a virtual world means the sales cycle for emerging managers is being elongated as investors go through a deeper due diligence exercise, in lieu of face to face meetings. In this tough environment, niche players are more likely to triumph.
For new and emerging managers, capital raising is always going to be the first and arguably the most important hurdle they have to overcome. No matter how avant-garde their investment strategy is, they need money to implement it so getting access to those funds is the key to getting started.
Although organisations were quick to adapt to working remotely, the Covid-19 pandemic has thrown a wrench in the works of traditional capital raising campaigns which relied on roadshows and extensive travel to meet potential investors.
Faryan Amir-Ghassemi, partner, Epsilon Asset Management comments: “The catalyst for finding those early supporters has become a little harder. We operate in a business where trust is paramount, and so the inability to meet people can be insurmountable for a lot of organisations.”
According to Danny Dayan, founder and CIO at DWD Partners: “As an emerging manager, you are a less recognised brand. You do not have the ability to simply call for additional capital as easily as the larger, more established firms. Therefore, it is crucial to focus on building relationships with your investors and potential investors in order to raise capital. Relationship building is certainly more challenging during the pandemic.”
Managing partner & co-founder of CARN Capital Christer Bjørndal has a different perspective: “Everyone says video conferencing works very well if you know the people, but my impression is that it works for introductions as well and can be almost as good as physical meetings.”
He finds virtual meetings “shorten the timeframe of getting in touch with investors across the world. Conducting meetings online limits the friction, cuts down on traveling costs and on time, which is positive, especially for smaller organisations.”
But this has not been everyone’s experience, in Amir-Ghassemi’s view: “Investors aren’t diving into the pool quite as quickly. So plans get attenuated and the cycle gets elongated. If you are a new fund that had existing relationships with LPs, you’re probably having a completely different time compared to those that didn’t have them. I think continuation dialogues are doing very well on Zoom as opposed to new dialogues which may be a little bit more challenging.”
Dayan also speaks of an extended sales cycle: “The entire allocation process, from sourcing, to initial meeting and finalising a commitment, takes longer in the current environment.”
Shifting balance of power
The struggle to raise funds is largely due to changing industry dynamics. Amir-Ghassemi comments: “In the last cycle, we’ve seen the balance of power shifting from the GP to the LP. Fifteen years ago, new hedge fund launches were oversubscribed and hedge funds could pick the LPs they wanted to work with. Nowadays, this has been inverted and the fundraising environment has become even more difficult.”
This means startup and emerging managers need to balance their need for capital against the sacrifices they are willing to make to get it. Amir-Ghassemi warns they may be at risk of giving too much away.
Discussing the potential of this, Dayan notes: “I’ve seen this happen in the past and I tried to design my firm to not be susceptible to it. As a manager you certainly can give away too much and there are times where you have to walk away from deals, even though they may be very enticing. As a fund manager, you don’t only have to focus on having a good trading strategy, you also must build a viable business. We think it’s very important to be a profitable business from Day One, more so than just chasing as much as possible. I know not many fund managers look at things that way.”
One consequence of this shift of power from the GPs to the LPs is greater transparency on behalf of managers, a trend which has been further accelerated by the pandemic.
Amir-Ghassemi outlines: “The days of measured and controlled access to information are over. You now have more of a running dialogue. Many new, highly-pedigreed managers have a greater desire to be open about the way they think about the world and their portfolios. You’re even seeing some Old Guard managers evolving and adapting the way they interact with the public as well as with their clients. This is a function of the change in that balance of power, as well as a change the velocity of information.”
These raised levels of transparency can also be a result of large market events like the GameStop run which saw retail investors piling into shorted stocks, causing markets to go haywire. Dayan details: “The GameStop saga is going to lead to increased transparency with investors. Investors are only going to ask for more information on short-selling, liquidity and stop-losses. Some managers may resort to buying puts as opposed to shorting stocks in order to avoid public disclosure of positions. This can lead to more elevated volatility than we are accustomed to at this stage of the economic recovery.”
A time for niche players
Although the market environment may not be the most conducive to asset raising, the volatility has allowed managers who have a truly unique investment approach to shine.
Dayan comments: “Given the extreme volatility in equity allocations observed on both the up and down moves over the last year, we think investors will continue to look for uncorrelated strategies that offer them diversification.”
Amir-Ghassemi agrees: “Having a differentiated story is important. New funds are launching with different portfolio construction philosophies. They’re also launching with a different philosophy around how they interact with their LPs and how they cultivate those relationships. When LPs hire an active manager or a specialist in the alternative space they’re not asking them to control the traditional market beta risks, they’re asking for them to deliver on their area of expertise. Some of these new hedge fund launches are hyper concentrated and can have maybe five to 10 positions and allocators are gravitating more towards this model.”
In CARN Capital’s case, having a niche focus has worked to the firm’s advantage. Bjørndal comments: “We are operating within a niche and we don’t have a need to become very large very fast. Our product works, and if investors like it, they buy it. If it takes 10 years for us to grow the assets to our capacity, that’s fine. We have enough capital and we like our jobs, which is why we’re not a very sales focused organisation.”
Bjørndal’s team have recently made an alliance with a third party marketer: “We have established a relationship with one at the end of the year and they can target some of the largest players with whom they have relationships. We probably would have done this even if there was no pandemic since our strategy was to start meeting with investors internationally in 2020.”
Others also speak of the growing importance of digital introduction platforms. Amir-Ghassemi discusses: “Some of the more forward-looking prime brokers and some of the event planning organisations are testing these digital forums to connect LPs and GPs. But people are now realising their success depends on how well curated they are – whether they’re exclusive or whether the allocators are overwhelmed by a flurry of managers.”
Dayan is also considering this option: “It has become very important in this environment to look at digital platforms, capital introduction events and other virtual meetings in order to get directly in front of the target audience.”
“We’re looking at platforms, cap intro events and other virtual meetings where we can get directly in front of the decision makers to tell our story. It is something we have to do and which in this environment is very important.”