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Raising Money for Fund Managers
Written by Frank Packard
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Based on our experience with fund managers and our knowledge of investor preferences, we believe the following activities are the best practices that will create the optimal platform for raising capital in Japan.
Marketing Roadshows
Investors in Asia are buying a relationship with the fund manager. It will be essential for the portfolio managers to visit Japan at least two to three times per year. Particularly as Japan reopens its borders to businesspeople after over two years of restrictive border controls, it is important to make the effort to reconnect in person with institutional investors in Japan.
The sales cycle in places like Japan can be quite long, but, for the right fund, the allocations can be of a reasonable size and quite “sticky”, meaning long-lasting.
Before the visits, you should pre-qualify investors based on their past allocations, current strategy preferences, openness to new managers, and available cash resources to make allocations in the near term. After the visits, it is important to follow up with each investor, present investing newsletters, and explain the components of the manager’s strategy, risk management, etc.
Client Contact
Each territory has its own business customs. In Japan, even after the original face-to-face meetings with the fund managers local agents will often need to conduct follow up meetings face to face as well.
Training
Raising money is most successful when the investor-facing team has had ample training in the strategy. You should consider making an investment in at least one intense day of interaction, either in person or in a virtual setting. The program should include time with the portfolio managers, the risk managers and investor relations team about how to best describe the fund, identify key themes, differentiate from similar strategies, and address past issues raised by prospective investors.
Marketing Collateral
The successful fund manager will approach the market with a well-thought out set of marketing materials. Before launching a capital raising campaign, the best managers will have prepared updated documents, including:
- A deck of slides describing the fund strategy, the manager’s experience and background, etc.
- A Due Diligence Questionnaire
- Clear explanations for risk management, operations, liquidity controls, etc.
- References for key personnel
- References at the key service providers
To be sure, a fund manager will only share the most relevant documents in the early meetings. At the same time, for many and diverse reasons, it is extremely valuable to organize all these materials before starting to meet investors. First, the materials need to be thorough and accurate; a mistake in these topics will create doubts about the quality of a fund manager and raise unnecessary obstacles. Take time to do it properly. Second, some investors might move more quickly than expected because a fund manager strategy meets their exact requirements. If you do not have all the documents ready to roll out, then you will lose early success in fund raising. Third, the fund management business can grow faster than expected and pull the leaders in different directions. Growing businesses can have surprising demands to management attention.
The materials reviewed by compliance should make sure there are no promised returns, guaranteed performance, etc. Also, attention needs to be paid to explaining thoroughly the underlying assets and financial instruments, the investment strategy, the risks, and to getting all the disclaimers right.
General Guidelines for Best Practices
Consistency Leads to Success. Consistent performance, reporting, transparency, and human relations are the key factors in raising money. These can be facilitated and enhanced by working with the right on-the-ground team to keep the significant topics of the day in the front of investors’ minds.
Regular Human Relations. The manager will be best served by a consistent marketing person, or team, and well-prepared Due Diligence exercises (data rooms, interviews, etc.) in the head office of the manager. Investors will expect to make a relationship with, as well as an allocation to, a fund manager. Sometimes Americans visiting Japan can have different representatives on different trips. To the extent possible, deploy always the same person to meet investors.
Distributor Licensing. Fund managers should take care to make sure that the representative in Japan has all the proper licenses for each and every activity. For example, in Japan both the company acting as the agent of the overseas fund manager as well as the customer-facing staff in that company need to be licensed by the Japan Financial Services Agency, which in Tokyo acts through the Kanto Local Finance Bureau.
After Sales Support. Investors will require timely and comprehensive reporting. Some investors, especially banks and other institutions subject to Basel II and Basel III, may request position level transparency. Many Japanese institutions will have annual, or even more frequent, travel to meet the manager for regular Due Diligence and portfolio reviews.
The Five Ps of Raising Money: General Best Practices
Written by Frank Packard
About the author | More insights | Contact the author
This article has two parts.
Part I describes some of the essential parts of raising capital for any undertaking. Part II focuses on best practices for alternative investment managers – such as private equity, venture capital, etc. Whether you are raising money for a startup company or a fund, successful pitches revolve around how you answer five important questions:
- Who are the People?
- What is their Philosophy?
- What is their Pedigree?
- What is their Platform?
- What type of Performance do they expect?
People
People are the heart of any enterprise. Any investor is going to want to meet the leaders of a business or a fund to hear their vision and to get to know them in real life. A common mistake is to rely entirely on staff or outside placement agents to make a pitch to an investor.
Sure, it makes good sense to work with agents to pre-qualify prospective investors. At the same time, first impressions count, and CEOs and founders need to show the face of the company to each investor early in the capital raising process.
Philosophy
What do you stand for? Why are you passionate about this investment strategy? Do you have a larger view of yourself, your company, and the world where this investment idea fits?
Pedigree
What did you do before launching this business activity? Where did you work? What roles and responsibilities did you have? Where were you successful in the past? How is this connected or relevant to the new undertaking? Which are the most impactful parts of your business career that have made you into the woman or man you are today?
Platform
Which law firms have prepared your documentation? Which service providers are hosting the virtual data room, managing accounting, handling fund administration and reporting? First impressions count. The care with which you assemble the platform for your business, in the eyes of Japanese investors, will indicate what type of investment manager you will be and will how much you care about your investors.
Are you licensed for your investment business, and are you working with licensed parties? Some transactions will require licenses for securities brokerage, investment advisory or asset management, depending on several factors, including who pays you and how.
Broadly speaking, if you are going to be compensated by the Issuer (the entity that is receiving money), then you are in the securities brokerage business. If you are going to be compensated by the Investor (the entity that is bringing money to the deal), then you are either in the investment advisory or asset management business. [NOTA BENE: This article is not offering regulatory or legal advice; you should check with qualified legal advisor as to which licenses you and other members of the platform might need to conduct your business activities.]
In my experience, it is a bad idea to try to collect money from both sides. Occasionally, I have seen this practice, and in certain circumstances it can comply with regulations to receive fees this way. However, it can cause trouble, such as confusion about who is the client and which party the agent or consultant is really working for.
Performance
Years ago. a former boss gave me one of the best descriptions I have ever heard for fund management. He said, “There are three parts. First, you describe to investors in detail what you are going to do with the money you receive from them. Second, you stick rigorously to doing only what you have promised to do (in other words, avoid any investment style drift). Third, you give the investors back more money than they gave you. The rest is commentary.”
From my experience in raising money for over 20 years, not only in Japan, but also in other developed countries, I have my own bitter joke. It applies to all investors, all over the world, and at all times: The problem with collecting money from investors is that they want their money back.
Too many fund managers are forgetting this core point. Investors will expect a coherent and persuasive plan for you not only to make money from your activities, but also to have a plan for returning money to your investors.
Conclusion
Different cultures have different priorities. In my experience the 5Ps work in best in Japan in the order written above. However, if I to conduct these activities with potential investors in America, then I would present these topics in the reverse order. Here’s why. Americans can often focus mostly on performance. Japanese can often the other 4Ps. In Japan, many people believe that with the right people, pedigree philosophy and platform, then you are likely to achieve your predicted investment performance.