Breaking Barriers – Capital Raising for Emerging Managers

In today’s ultra-competitive alternative asset industry, performance and the ability to attract institutional and high net worth investors are paramount.  While sophisticated investors seek out the best alpha generation opportunities within their specified risk parameters, the route to success for emerging managers presents a number of additional obstacles compared with more established managers, who can draw on a positive track record, brand recognition and an established investor base, as well as their operational infrastructure and broader networks within the funds space.

Fundraising Challenge

Fundraising represents one of the greatest challenges for any new manager. In the current turbulent market environment, emerging managers need to differentiate themselves with a clear investment strategy coupled with a robust business plan in order to achieve success.  Emerging managers should be able to clearly articulate both their investment strategy and operational infrastructure and outline why they are confident their strategy will succeed.

Long fundraising periods are now very much the norm and emerging managers should take this into account in their planning process. Early targeting of potential investors and continued engagement to cultivate relationships is essential. The use of placement agents can also be useful in capital raising or securing introductions with allocators. Any proven track records from previous employments or ventures by the principals should be highlighted.

Investors are increasingly demanding more from managers with respect to communication, transparency, reporting and their due diligence process, so demonstrating a thorough understanding of these areas is vital. Fee compression may also be a challenging issue for emerging managers and innovative fee structures can be discussed with allocators to help ensure adequate infrastructure and compliance regimes are put in place.

Whilst some investors may take a less enthusiastic view of emerging managers when compared to more established counterparts, demand from institutional and high net worth allocators still exists from both a diversification and alpha generation perspective.  Emerging managers, however, should be willing to establish fund of one structures or managed accounts which allow for better oversight by the investor than is commonly allowed in traditional commingled funds. Alternatively, seeding arrangements incorporating preferential fees with lock in provisions, and/or sharing of some of the emerging manager’s economic allocation or fees could entice some institutional investors to invest in the flagship fund and provide for additional AUM stability.

Operational Considerations

Sophisticated investors will be sharply focused on the operations and associated infrastructure of any emerging manager they are considering allocating to. Demonstrating documented operational workflows and robust infrastructure are critical to successful fundraising. Emerging mangers will typically have fairly limited resources and balancing the requirement for a robust infrastructure with financial constraints can be challenging. Taking short cuts to developing a solid operational framework rarely pay off, however, and can be expected to be highlighted in any investment or operational due diligence review.

In order to manage overhead costs, emerging managers may wish to start out by outsourcing some of the operational aspects of managing a fund, such as compliance functions, or middle and back office, until such time as the AUM base is sufficient to internalise such roles. The increased global regulatory environment has resulted in demands for investor reporting that require substantial investment in technology. Cloud based applications, analytical tools and measures to address cyber security are pivotal against this backdrop. Serious consideration, therefore, should be given to service providers that can provide several of these necessary operational requirements. Significant benefits can be derived from a service provider’s ‘one-stop shop’ approach, given their familiarity with the product and any bespoke requirements.

The Maples Group can provide a full suite of services to support emerging managers. With our long history in the alternative investment funds space, combined with a robust institutional infrastructure across a broad global network, we have the capability to support new managers along the route to securing initial capital through to a successful launch. In addition to Maples and Calder acting as legal counsel, we also provide fund administration and middle-office services. From a fiduciary perspective, our teams can provide independent directors to the fund or its governing body, prepare financial statements, provide AML officers as well as assist with governing body corporate governance support, along with a variety of other regulatory compliance functions. In Europe, Maples Fund Management Ireland Limited (“MFM”) is the Maples Group’s AIFM and UCITS Management Company providing services to EU domiciled funds and can offer a comprehensive range of distribution support services, designed to sustain business growth and enhance asset managers’ distribution strategies, including the raising of capital for European Funds.

With the Maples Group’s renowned expertise in alternative funds, our teams possess a strong understanding of the challenges faced by new managers with solutions that are grounded in the commercial realities of the industry, drawing on the experiences of our world-leading client base. If you have any questions about any of the issues raised in this article, please reach out to Sinead Wagner, Caroline Heal or your usual Maples Group contact.

For legal and regulatory disclosures, please visit maples.com/legal-notices.