Let’s say you’ve got access to some allocators, possibly through a capital introduction agreement through your prime broker. Any manager of money trying to convince allocators – private or institutional – needs to grasp the fundamentals in order to efficiently raise. These included, but are not limited to, having proper fund marketing materials, a CRM/IRM system, multiple forms of contact including email, in-person, phone calls, being skilled at answering DDQs and tackling hard questions, not hiding information, for example about down months, and others described in this article.
After working with several CIOs/CEOs in fundraising, I’ve divided these tasks into two dimensions, and added a third one to maximize effect in capital raising.
The PPP Model: Performance, Processes and Persuasion
All efficient capital raising dimensions can be grouped into one of three dimensions: Performance, Processes and Persuasion. In detail:
- Performance is the most natural one. At the end of the day, it’s all about edge. Allocators rationalize their decisions about performance with things like “didn’t really like the manager”, or “something was off”, or “this wasn’t what we were looking for”. All marketing and persuasion techniques are additional to performance, as performance is key, save very rare exceptions;
- Processes is the second element. For any allocator, but especially institutions, they invest in replicable processes and systems, not individual situations. In fact, it’s better to have stable, consistent returns of more modest performance than having a brilliant month, then a mediocre one, then brilliant again, then negative. The key word is consistency, not only in the investment process but in risk management and compliance, auditing, fund administration, talent management and development, and all other areas;
- Persuasion. The third and final part, that many CEOs/CIOs don’t really master. The capability to diagnose personality and negotiator types and use them to better persuade allocators takes care of the emotional/subjective part of the process. It doesn’t make up for bad performance, but it’s a great edge to have among similar candidate funds;
Staples: Performance and Processes
Performance and processes won’t be within the scope of this article as they are well-known in the industry. While performance naturally comes from the efficiency of your investment process, efficient institutional-quality processes come from iterating your current firm systems and processes and improving on them until you have consistent money-making process with all of its components. This can include but is not limited to:
- Replicable, systematic, unique investment process;
- Replicable, systematic fund administration and operations;
- As part of the previous, but important enough to merit its own bullet point, replicable, systematic risk management and compliance;
- Replicable, systematic talent management and development;
- Replicable, systematic research criteria, models and checklists;
The Forgotten Dimension: Persuasion
Here is where the rubber meets the road. Considering two managers of money, after getting their capital introduction agreements from primes, face an exactly equal allocator, you would think their chances are equal. Very far from the actual truth. The capacity to clearly articulate the investment process, to tailor communication to the personality type of the person sitting across the table, and the capacity to tailor the level of detail to private/institutional allocators is key in raising capital. Tackling the three in detail:
- Clearly articulating the investment process is the most important component. For many investors, especially those that don’t grasp the full complexity if your investment methodology, they will use how well you articulate the process as a proxy for the quality of the process itself. In other words, if your process is great but you can’t explain it, it’s a bad process for allocators, and if your process is bad but you can articulate it well, allocators will think it’s good.
- You might say due diligence is what will actually test the quality of the process, and you would be right, but the problem is that managers that don’t articulate well in the beginning don’t even get to the due diligence stage;
- By analyzing the allocator’s personality or negotiator type, using a framework like the Four Perceived Personalities or other known tools such as the Alpha Male Leadership Type or Tactical Empathy’s Three Negotiator types, you can tailor the message to the person, maximizing rapport and your chances of being selected. Do they care about the vision? Surpassing others? The details? Having the right performance and processes counts. But being liked also does, a lot.
- Although in the due diligence phase the allocator will care about the deepest details, in terms of the actual conversation and building empathy and rapport, you will come across personalities that focus on different aspects – tailoring communication to them will help you succeed;
- Tailor the level of detail and even education to private vs. institutional investors. Institutional investors will probably familiar with the investment processes and asset classes you mention, privates may not. Focus on educating private clients, not drowning them with too much detail, and on providing all the intricate details to institutional investors, not risking coming across as too generalistic;
The PPP Model for Emerging Managers
For emerging managers, the Persuasion component is even more important than the other two. In rare occasions do emerging managers come with properly audited good performance numbers. So, in most cases, allocators invest in emerging managers due to their potential for success versus the numbers. Qualitative versus quantitative. In this case, the priority is reversed, becoming Persuasion > Processes > Performance. Performance cannot be shown at this stage in most cases, but the manager must demonstrate they are the right person and they have the right “machine” in place to raise money.
Conclusion: Using the PPP Model
What do you do when you’re sitting across the table with an allocator (after a capital introduction agreement with a prime, for example)? Although all the fundamentals of raising from allocators should be respected, dividing the main tasks into these main groups facilitates comprehension of what you must do. Performance is always the edge, processes are crucial, especially for institutional investors, but persuasion is the glue that holds the model together and allows you raise money when other managers will not.
Postscript: It Starts with the Capital Introduction
Many managers of money think they will “blitzraise”. Show good performance and institutional processes to an investor in the first meeting, and they will immediately allocate. No so. You have to count for the process to be a long process, starting with the initial capital introduction agreement to the actual allocator, and that will take several meetings, due diligence (not just with DDQs but even beyond that), and that it might take several months to invest.
You have to see allocators as long-term partners that will check in regularly to know about performance, how your fund is going and evolving, and that might come in sooner or later. It’s not a 2-lap race where you climb on the podium after ten minutes, it’s the Le Mans 24 Hours where you will need strategy, different tires as weather conditions changes and multiple pit stops… but in the end, if you’ve survived and thrived across different conditions, you might just end up as number one.
A very interesting article from the Hedge Fund Journal tackling the topic of raising capital from allocators can be found here.