In this new monthly blog, Joel Press, formerly a senior partner and Head of the Global Hedge Fund Practice at Ernst & Young, and a leading voice on hedge fund operations and co-ordination services, talks through an array of considerations on how best to prepare for a successful hedge fund launch. In this first installment, Press, who works on a discretionary basis with a handful of start-ups each year through his consulting arm, Press Management LLC in New York, discusses the key business planning issues, including access to capital…
In this new monthly blog, Joel Press, formerly a senior partner and Head of the Global Hedge Fund Practice at Ernst & Young, and a leading voice on hedge fund operations and co-ordination services, talks through an array of considerations on how best to prepare for a successful hedge fund launch. In this first installment, Press, who works on a discretionary basis with a handful of start-ups each year through his consulting arm, Press Management LLC in New York, discusses the key business planning issues, including access to capital…
During this monthly series of blogs, when I refer to meeting new managers I am referring to people who have already left their current firm, as opposed to merely thinking about it, and are, inevitably, still going through a non-compete period; which can last anywhere from three months to a year.
When I set up the initial meeting, the focus is always about defining the overall business. Why does this person think that investors will give them money and trust them? When it comes down to anyone who is a fiduciary to other people’s assets, it always boils down to trust: do you believe in what the manager does and what they say?
One of the first questions I ask, therefore, is ‘How do you distinguish your message from the thousands of others in the market?’
In these early discussions, my role is to help start-up managers understand what they are and who they are, before they go out to meet investors, in a way that is both commercial and understandable.
Then I discuss what is the individual’s connectivity to money; that is, to what extent do they know investors? Do they have a network of contacts? Typically the response will be that they know capital introduction people, they have friends and family capital commitments, etc. That’s fine, but the process of engaging with new potential investors is a complex affair.
Rarely will an investor say ‘No’ outright.
They’ll politely listen to your story and they either won’t get back to you (‘ghosting’) or they’ll say, ‘Send me your fund information’, without making any sort of firm commitment.
Be prepared to do lots of meetings. Train yourself to smile and tell the same story repeatedly. Personality shouldn’t come into raising capital, but it is a key factor.
I’m working with someone currently who has had seventy meetings and it looks like its going to be a good launch. The manager has been sought out by investors, he has existing LP relationships from his previous role, but not one investor has yet said, definitively, that they are ‘IN’.
Raising assets is complex, and it becomes even more complex if there is a seed investor involved.
Negotiating a seed deal takes many months and if you’re waiting on a seed deal before launch, it can cause delays. A seed investor is going to want input into your organization, into your fund terms, so you can’t really go out and market; nor would you want to until you’ve finalized the seed deal, as having a seed investor’s blessing is a great marketing advantage.
My role at the pre-launch phase is to help start-up managers get their structure and terms clearly defined and that if they do go to a seeder, that they understand what a seed deal entails. Every seed investor has a particular way of operating and provides different advantages, and there is a limit to what you can and cannot negotiate with them.
What I tell clients is that when they go to an investor meeting, they should have a very sophisticated term sheet that lays out almost what an offering document would, but in summary form. The manager should be able to clearly explain the strategy and why those terms make sense to that strategy.
Never criticize the firm you came out of. Never say you’re better.
Your job is to explain who you are, how you look at risk, how you make investments, and ultimately to present your vision for the investment strategy.
Another important facet is to talk about the things that are hard to talk about: what was your worst trading loss? How did your learn from that? Bring out the negatives in any investor discussion, as it’ll present a more complete picture of who you are.
Explain how your strategy fits into the profile of the markets.
As you move closer to your target launch date, you will find it is very hard to judge who will commit. The reality starts to dawn 30 to 90 days before you are due to launch.
You will call investors and tell them you’d like to send the subscription documents; that’s when they will ultimately say yes or no. And even when they say yes, it still doesn’t mean they’ll write you a ticket. It’s rare that if they fill out the subscription documents they don’t invest, but I’ve seen it happen in the past.
I will typically work with a new manager up to a year ahead of launch, to focus on messaging, on presentation and on preparing the term sheet, so that the individual really understands what is required when embarking on the business of running a hedge fund.
As Benjamin Franklin wisely remarked: By failing to prepare you are preparing to fail.
In February’s blog, I will delve into a bit more detail on how to think about building the team and the internal infrastructure, including working with service providers.
