Over the years of meeting emerging managers, I have found a common theme. They often believe when they start a money management firm, investors will automatically find them and invest. In other words, it is the “I build it, and they will come” perspective. Unfortunately, the new managers often miss the point; they started small businesses. There are many components to handling any business, including marketing/business development, technology, hiring employees, vendors, compliance, and operations. Like most businesses, marketing/business development is often the key to growing or slowing the business. This article discusses several points related to marketing/business development.
Marketing / Business Development
Managers often believe that investors will automatically flock to them once they hang their shingle and start their business. However, it should be understood that unless the manager has deep pockets or some large initial investors, they will often spend the first several years trying to get onto the radar of many investors and platforms. This is all part of building their company brand and explaining why they are unique from many competitors. Managers often view marketing and business development as a cost when it should be perceived as an investment and implemented into their operating budget.
Operating the Business
When investors ask for at least a 3 to 5-year track record, it is partially about the manager’s ability for consistency of trading and risk management. However, the investor also wants to see how capable the manager is of running a business. The manager may have a great strategy, but if they can’t operate a business properly, investors may not invest. Both the front and back offices need to be sound. Sometimes new managers focus on the strategy and don’t realize the need for an organized back office.
Obtaining Institutional Investors
Once the firm begins to grow, there is often a point when they determine how to take the firm to the next level. One of these moments occurs when they decide to raise assets in the institutional investor space. I’ve found many emerging managers don’t realize the time and resources needed to invest in the firm before getting an allocation from an institutional investor.
For example, the investor will want to see a certain level of business infrastructure; this would include personnel, technology, disaster recovery plans, and outsourced parts of the business, such as who the lawyers and accountants are. There is also a time commitment regarding several meetings with the potential investors before they invest (if they invest). The manager should realize the investor may be interested in the manager but may not invest until the manager reaches a certain size of assets under management or until the investor has space in their portfolio for the manager. Depending on who you talk to, institutional investors have different definitions of emerging managers. Some may say $25 million to $100 million is emerging. Sometimes they define emerging in the neighborhood of $250 million in assets. The bottom line is that it can easily take six months to two years or longer from when a manager begins talking to an institutional investor to the point of the allocation occurring.
The capital is not just about capital for the investments, but like any business, they need the operating capital to run the business’s day-to-day operations such as payroll, rent, technology, marketing, and paying vendors. Is there enough operating capital to run the business for the first few years? If the investor feels the manager is operating on a very tight budget, they may not invest.
In summary, the manager should realize it is a slow process to raise funds. They have to develop a long-term strategy, care for all day-to-day operations, be willing to invest in their business, and realize many parts overlap into business development.
Mark Shore is an Adjunct Professor at DePaul University’s Kellstadt Graduate School of Business, where he teaches the country’s only known accredited managed futures course. He is also a Board Member of the Arditti Center for Risk Management at DePaul University.