Many of the fund managers/CEOs/CIOs that I coach raise capital from allocators. Although there are different requirements requirements for different investors (retail vs. institutional investors, for example), and several techniques that can be used (including the PPP Model), there are usually some “fundamentals” to follow. Let’s talk about these.

Although there are countless areas one can cover, I usually focus on nine fundamentals of raising capital (if you want a mnemonic to memorize them, you can summarize them with the acronym ALPHATALKS):

1. Clarity of Articulation of the Investment Process;
2. Long-term Perspective;
3. Allocation Planning;
4. Providing Holistic Data;
5. Acknowledging Ongoing Due Diligence;
6. Providing Transparency;
7. Accountability on Your Word;
8. Leveraging Current Investment Quality/Percentage;
9. Knowledge of the Decision-Making Process;
10. Readiness for a Strong Month;

1. Clarity of Articulation of the Investment Process

Many allocators – especially private ones, who don’t understand specific investment strategies or asset classes – will use the clarity with which the manager describes the process as a proxy for the quality of the process itself. The basis for this is that the way a mind works in communicating is the same it does investing – managers that get lost in the details or can’t put together a structured presentation will also get lost in investing and won’t put together a structured portfolio/strategy.

This might sound unfair, but it is what is. Knowing that managers that best communicate their investment process are seen as having the actual best processes, make an effort to articulate the process clearly.

2. Long-Term Perspective

What separates “amateur” small fund managers from longer ones is their presentation of a 3-5 year perspective versus only a 1-2 year one. This tells the allocator you’re a long-term partner and are aligned with their long-term goals. Failing to provide a long-term timeline is a proof of not being adept at raising and managing capital.

3. Allocation Planning

One question many allocators don’t ask, but that especially astute ones will – and that it’s good to have an answer for – is how will your company be affected by this allocation. Do you have the resources to fully invest the capital? How soon? Is this going to strain your existing PMs? Are there enough new opportunities to justify investing this new capital? Making a concrete plan for how this allocation will change your firm, when and how it will be invested goes a long way in showing professionalism to allocators.

4. Providing Holistic Data

This is a very simple point. Some managers try to escape showing drawdown months or especially bad situations, such as an underperforming PM, by either massaging or editing the data. This is a major red flag for any allocator and will be smoked out very easily. This is common sense for top money managers, but don’t hide bad numbers. Allocators are more likely to invest in reasonable consistent returns than fake, edited, spectacular returns. They are very good at sniffing out when a money manager is hiding or editing their numbers – and at burning them for them and their whole allocator network.

5. Acknowledging Ongoing and Pervasive Due Diligence

Good money managers know the due diligence process is hard. Great money managers also know it’s never-ending. All the activities that a manager undertakes in order to convince their allocators – articulating the investment process, understanding how talent and strategy changes impact returns, planning allocations, providing full transparency with third-party audited returns – are activities that do not stop once you raise capital and that must continue in order to keep good IR, especially with institutional investors. Good due diligence never ends.

Besides being ongoing, good due diligence is also pervasive. Great money managers know filling the DDQ is only the start, and that good allocators will grill them on key questions, such as down months or the leaving of a key person in the team, and they prepare to be questioned and answer these tough questions.

6. Providing Transparency

Transparency has been one of the biggest trends in allocations, along with liquidity, in more recent years. In terms of transparency, money managers who can’t provide third-party audited returns of latest performance are not considered. Great money managers don’t wait for allocators to provide them, providing them before they are even asked.

7. Accountability on Your Word

This seems like a small element, but it’s a key one. Being accountable to your word is seen as crucial for allocators. In practice, if you say you’re going to send a document that night, send it that night. If you say you’re going to provide specific information, provide it. Allocators are very sensitive that a manager promises and what he actually does, because they see that as a signal of how he behaves in general.

8. Leveraging Current Investment Quality/Percentage

Just like with planning how future allocations will affect the fund, it’s important to be open about what current ones. Institutional investors will especially grill about this. How much of the money already allocated is actually invested? How soon did it take for that money to be fully invested? Allocators will have a hard time investing if the currently allocated money isn’t even fully invested – they see that as the starting point to measure what you are going to do with their money.

9. Knowledge of the Decision-Making Process

This is a crucial point. Allocators must be crystal clear on what the decision-making is for an investment opportunity, from idea through research to execution. Does the CIO have final say and veto power over opportunities PMs want to execute on? Can risk management change PM allocations based on performance, or can only the CEO/CIO do that? Can risk management and compliance block trades or merely flag them? An unclear decision-making process is a red flag for serious allocators.

10. Readiness for a Strong Month

This point is not about something you do in the meeting itself, but in preparation. The goal is to be ready to step up allocator meetings in a month of strong performance. Therefore, when you suspect you are going to have a particularly strong month, keep investor leads warm through proper communication and/or marketing, keep the fund materials updated, and have third-party audited transparency records ready to hit the ground running.

Therefore, when performance is exceptional, you will have everything in place to only need to pick up the phone and start booking meetings.

Conclusion: Effectively Raising from Private and Institutional Investors

There are several bases to cover in terms of raising capital, especially from institutional investors, but managers of money that have good performance and processes, and that are clear on key components of the functioning of their fund/firm can go a long way in obtaining allocations.

Great managers know that due diligence is never-ending and that allocations must be planned not to strain the team or compromise investment quality, among other key aspects.