CHAPTER 7

Premarketing and Marketing—Process, Tasks, and Priorities

In marketing, it is important to follow a systematic process. For experienced marketers, this process typically takes the form of a weekly task list.

The list includes tasks like:

1.   Seek updates from investment team about fund and markets.

2.   Respond to all requests from and promises made to LPs.

3.   Reassess the fundraising pipeline.

4.   Provide and receive subscriptions update from operations team.

5.   Prepare for upcoming due diligence visits.

6.   Share feedback, concerns, and pushback from LPs.

7.   Update presentations and other data you plan on sharing with LPs.

8.   Follow up with LPs who have not made progress toward a decision.

9.   Review subscription agreements to avoid issues at closing.

Marketers must nurture and build their brands with care and diligence over time. How you deal with investors affects your reputation and that of your firm. The best approach is to focus on what will matter to your investors and whether you are prepared to address their needs. There is no consensus on how much information should be shared with and what is relevant to LPs. Some frown upon what they deem to be too much or irrelevant information. Others might complain that the same information lacks breadth or depth. Even within the same investor firm, there may be different points of contact—such as the investment staff, operational or finance teams, their advisors or consultants—asking for different information or different formats.

Sometimes, the tax status of an investor—whether they are a tax-exempt entity subject to the unrelated business income tax (UBIT)—or the structure of its relationship with the fund manager (single-fund investor versus multiple-fund investor) may spark a data request from LPs. The task of the IR team is to parse out what is required, what is reasonable, and what would impose a significant burden on the investment, operations, or finance teams to fulfill the request.

Of course, you should apply sound judgment when information is being requested by a large LP or by LPs representing a significant percentage of the manager’s AUM. Any pushback needs to be thoughtful, justified, and professionally communicated. You may point to widespread practice as a standard, but technically no standard exists. Private equity funds can use ILPA templates to make a case.

PITCHING THE PRODUCT

In contrast to responding to investors, there is proactive marketing communication that forms the bulk of investor interactions during a fundraise. Preparatory work for marketers involves creating marketing collateral and educating or prepping the team on expected outcomes from each customer interaction.

Before delivering your presentation to potential LPs, obtain an opinion about your pitch from trusted LPs, consultants, and placement agents. Do not test-drive your presentations with potential LPs; it will be a costly exercise leading to missed opportunities, and potentially tarnish your reputation and adversely impact your fundraising momentum. Seek feedback without making it onerous, appearing disingenuous, or impacting your relationship with LPs.

Everyone in the company should be able to deliver a short marketing pitch effectively. Differentiate between the best investment managers and presenters. One LP described a founder and portfolio manager as a “dead duck.” The best presenters can engage an audience with a communication style that resonates with LPs and gains their trust.

Always identify objectives and constraints for the team that will be present at a meeting. The minimum information you will need is about the investor’s organizational goals, its prior experience, and the background of the LPs representatives likely to join the meeting. The marketing team should be able to highlight key messages to be delivered—framed to relate to LPs and address potential concerns.

The same pitch delivered multiple times can create an air of monotony and kill the presenter’s energy. How do you keep it fresh and engaging? Tag teams will work. Change the list of team members at follow-up meetings, so the LP will not think that it is a rerun of an old pitch. Ensure you present new information to the LP or their advisor to avoid repetition.

Leave no stone unturned. To seasoned marketers, every person present at an investor meeting or with whom they interact elsewhere is important to the investment decision, no matter how junior or senior they may be. Prejudging the value or importance of people is detrimental to the marketing effort. A marketer may not know the internal organizational dynamics or who has the ear of the decision makers.

Your job is to convince the LP of the value your fund will add to their portfolio. The better everyone understands the strategy and develops a liking for the fund team, the higher the likelihood there will be a positive outcome. This is also an opportunity to build relationships for the future. There are many instances in which relationships that were built when an LP representative was new to the firm or served in noninvestment roles later yielded great results in fundraising when they moved to another firm or took on an investment role.

OTHER CONSIDERATIONS

One important issue for GPs to consider is to properly structure the entities and mechanisms. The objective is to improve the tax efficiency of carried interest earned through entities that are structured to minimize tax liability. If you anticipate capital allocation from US pension funds, add ERISA compliance expertise to the list of qualifications needed when hiring a law firm, as these have legal disclosure and due diligence requirements.

If there is excess interest from one type of LP, how should a GP turn down a potential opportunity? If the fundraising strategy is executed well, this is unlikely, since LPs being actively courted are those that are coveted by the GP. However, if there is immense interest from one segment of LPs and tepid response from other investor types, the GP may want to accept the investments until the maximum desirable threshold is met and then slow down the marketing to that segment. Buying time without creating a negative disposition is important. No LP wants to feel that they are less desirable than other LPs, especially after being solicited by the manager. They will argue that “my money is as green as anyone else’s.” Any ill feelings will sour the relationship now and cannot easily be redeemed in the future.

NEGOTIATIONS DURING MARKETING

Negotiate with an eye toward prioritizing the importance of LPs, depending on how much capital they have in the fund. If a larger percentage of LPs with soft-circled capital want to change certain terms, it can potentially be an indication that the terms are not in the right ballpark and need to be revised. Whether the requested changes come from a few larger investors or a group of smaller investors does not matter—they still affect the GP’s bottom line. Good side letters should be investor specific. If covenants in the side letter are overly broad, or impact other LPs in the fund, it should be a part of the fund documents instead of a side letter.

LEGAL ISSUES

There may be a need for local legal advice if the fund is being marketed globally, especially regarding registrations prior to marketing funds in these jurisdictions. This could include national private placement regime (NPPR). Regulations differ by type of vehicle as well (e.g., private equity, hedge fund). In some regimes, premarketing without naming the vehicle, or reverse solicitation if you have not done premarketing, is allowed. Reverse solicitation is easier when a PA is engaged. Pick a law firm that understands marketing regulations globally and can provide a marketing regulations matrix for each region or country.

In the last two decades, the alternatives industry has been subject to various regulatory requirements and investor information needs brought on by a changing investment environment. Some scrutiny is due to industry expansion. The diversity of experience among LPs will require a new regulatory paradigm and investor protection measures. Another reason for scrutiny from investors is risk management due to the shortcomings of many GPs during the financial crisis of 2008.

Increased regulatory oversight also came about as the industry matured. Examples include the tax treatment of carried interest, privacy regulations in several states, and data disclosure requirements from GPs and from LPs to beneficiaries in the case of Freedom of Information Act (FOIA) requests to public pensions and other regulated entities. Other catalysts for heavier industry regulation are self-inflicted, such as pay-to-play scandals and insider trading. Understanding LP sensitivity to the issues and their awareness of regulatory changes are key while marketing to and interacting with them.

MARKETING A FUND FOR THE FIRST TIME

New GPs should hold startup costs to a minimum and avoid incurring costs that can be delayed. Some large-cost items are setup and marketing, especially if a placement agent is involved. Final agreements and documents can be postponed until there is support from LPs to generate a minimum viable AUM. Placement agent fees are paid after the LP has been admitted to the fund and can be negotiated to allow flexibility without up-front costs. Understanding how investors view advantages and disadvantages of investing with a first-time manager would assist with crafting a message and increase the efficiency of the marketing spend. These include:

Advantages: Outperformance,¹ more co-invest opportunities, flexible terms for preferred investors, limited partner advisory committee (LPAC) seats, entry to new geographies, and deployment of new strategies.²

Disadvantages: Short or unverifiable track record, new team, uncertainty about their ability to deliver on promises, lack of established processes, and execution uncertainty.

A new GP must meet all the following criteria to be considered by LPs:

   Good track record of the principals and partners

   Sound investment philosophy and sustainable strategy

   Offers standard industry terms or better

   Alignment of interests

   Strong team and well-known service providers

   Good investor communication and excellent investor relations

   Robust operational capability

Partners of first-time funds and emerging managers should head the fundraising effort, even if there is a marketing lead, as familiarity with the manager removes another LP concern. Make sure you have a compelling personal story, explain why you wanted to start a fund, discuss clear attribution on past deals and ability to source future deals, and demonstrate the benefit to the LP.

How good is your network in terms of vouching for you, your capability, and your narrative? How are you different from existing funds, and how will you convince the LP of your ability to deliver results? Given there is no prior history of working with the LP, they will question your team’s ability to work cohesively and effectively. Investors will examine each interaction with the team for signs of confirmation or invalidation of their initial impressions about them.

One of the best examples of how some LPs look at first-time managers comes from a CIO of a family office. They believe emerging and undiscovered GPs are like the “hotshot gun slingers” who can find that elusive treasure and have the “fire in the belly” rarely seen with established managers. First-time GPs will do well to show this fire and to back it up with the skills and discipline to prove themselves. Without this passion, it will be difficult to convince an LP to back first-time managers who are critical about their strategy and investment process. Just be careful not to appear desperate or that you are “trying too hard.”

First-time GPs should also be willing to sweeten the terms to make the fund attractive enough to LPs and offset some of their concerns. Emerging PE managers can increase the size of their check and the total capital deployed by encouraging co-investments. This will help raise a larger fund next time. However, there is a fine line between offering a more attractive deal and being desperate to a point that concessions will negatively impact the fund’s prospects, economics, or strategy execution.

If you have an anchor LP, placement agent, or gatekeeper willing to work with you, it is acceptable to be transparent about wishing to revise the terms. Seek their input before making a decision. Involving them in the process not only demonstrates you are fair, transparent, and open to feedback, it also creates a sense of “we’re all in this together” attitude and ensures there is alignment of interests among all parties. Some LPs are open to paying the GP more when the results are superior (back-ended economics or higher carry share) and support a management fee structure that makes your fund viable.

Concerns arise when management fees far outweigh the cost of running a fund. Since a fund’s costs vary, many early backers of first-time funds will ask for a budget to ensure the manager will be viable at the expected minimum fund size. They will also seek to cap the size of the fund to ensure it can survive, but not thrive, on fees alone. In addition, a pro-forma budget allows the LP to see the team will be well-compensated for their value-add, instead of economics being concentrated toward the founders or owners.

Undoubtedly, LPs who back first-time GPs are underwriting a higher risk compared to more established managers and also have an expectation of higher returns. Early backers may see a component of venture investment with first-time GPs. They seek, and receive, a higher return for the risk they take through lower fees and preferential terms.

First-time managers do carry startup risk because they lead smaller teams, and even if they have good ideas, their execution is far from certain. One way to gain access to expertise is to outsource some of the team’s functions to well-known service providers. For example, auditors should be larger, well-known accounting firms. One caveat: you may want to hire them, but they may not be receptive, since they do not need your business. The GP should convince them of the growth potential of the fund. (Some have active emerging manager programs that incubate promising teams.) You may find the same with the fund counsel and fund administrator. Do not cut corners when hiring service providers; find other places to cut costs.

First-time GPs would do well to go after a handful of recognizable LPs—institutional or otherwise—to receive recognition by association. A mentor once gave this advice: “You won’t lose your job investing in a manager backed by Yale, Harvard, or MIT.” Association with blue-chip names gives the investment staff more confidence to invest with a first-time manager and that the staff will not appear imprudent to have assumed that risk.

INVESTOR RELATIONS

Most LP representatives are fiduciaries and are answerable to others. Similarly, they expect GPs to be answerable to their investors and fulfill their obligations to the beneficial owners and stakeholders. LPs need accurate and timely information that will help them monitor their GPs and make decisions at the right time. Even outside of the fiduciary relationship, it is the LP’s money that GPs are investing, and it is the LP’s right to know how their capital is being managed. A properly functioning investor relations program is a necessary and essential part of alternative investments. This includes timely reporting, transparency, proactive information sharing outside of regular reporting, and prompt responses to other investor queries and requests.

If LPs are not receiving the level of service they rightfully expect, there will be several repercussions for the GP. For one, a dissatisfied LP may withdraw some or all of the investment from the fund, or they simply will not re-up when the manager raises funds in the future. In addition, poor service can lead to investor complaints and calls to partners and senior executives, distracting them from their primary functions of investing and operations. Finally, less-than-cordial relationships with LPs can damage the reputation of the firm, create an adversarial relationship and lead to negative interactions. As such, a highly effective investor relations effort is invaluable to the GP.

DEALING WITH REJECTION

An emerging-market-focused hedge fund with a sub-$50 million AUM but consistent performance was unable to generate any institutional LP interest, despite repeated solicitation. The fund manager persevered with the outreach and received the first institutional allocation after six years of regular and thoughtful communication with an endowment. Shortly thereafter, AUM grew to $300 million.

A fund may be rejected for many reasons, but marketers need to understand the underlying cause and find creative ways to address them. Seldom is the rejection outright. Some common soft rejections:

•   “Does not fit our portfolio”

•   “Not allocating to any new relationship” or “only re-ups right now”

•   “Too busy with existing portfolio” to spend time on new relationships or allocation

•   “Client’s not interested”

•   “Sorry, that time does not work for us.” (repeated multiple times after requesting in-person meetings)

•   “Over-allocated to the strategy”

•   “Why don’t you send us the info and we will get back to you later?” (usually in response to a request for a follow-up meeting, after the initial meeting with the investor/advisor)

•   “Let us know after you have raised $XX million.”

•   Asking only about the progress of the fundraise, not the fund or strategy

•   Generic, ambiguous, vague, or nonspecific responses to your queries about their interest

Whether getting a soft or hard decline, it is important for marketers to maintain a professional relationship and to learn the reasons for the rejection. Sometimes, the LP may be reluctant to share the information or unwilling to be forthright. While this is outside of the marketer’s control, LPs are more likely to provide feedback to someone who worked hard to build the relationship and has proved to be credible and transparent.

For closed-end funds, the two common options of closing on an LP commitment include rolling closes (as soon as an LP commits) and a series of prescheduled closes (first close, second close, . . . and final close). The general advice is to “close on the money as soon as you can.” However, a series of closings with preset dates is more efficient and economical than closing on every single LP whenever they are ready. Announcing the date for the next close will have the effect of calling interested investors to action, but it can also backfire if there is insufficient demand and allows for investors to withdraw from commitments before the next close.

However, rolling closings can be more costly overall. A GP in a weaker position could opt for rolling closes after every commitment and demonstrate momentum, while a GP in a stronger position can meter out closings more regularly. The most in-demand GPs can dictate a single date or two and know the LPs will not push back. Others discount first closes and reach the quorum necessary to be noticed by others.

Fundraising is a function of how much the LP wants to invest in you and how much available capital the LP has to invest overall (liquidity). Providing an LP with flexibility around closing dates, especially from one year to the next, can be marginally helpful in dealing with liquidity issues.

During closings, LPs also expect a closing opinion from counsel to cover limited liability, and tax and regulatory issues, including private placement.

CONCLUSION

Headline numbers touting large and successful fundraises grab stakeholder attention in the industry. However, marketing campaigns are similar to farming. Much of the effort happens behind the scenes and is process dependent. For a successful harvest, you need time, the right nutrients, effort, and a bit of luck (weather). In marketing alternatives, premarketing is the foundational effort (like tilling, deweeding, and prepping in farming) that secures required resources and prepares the soil for a good crop season. Yet, no amount of premarketing in itself will guarantee a good fundraise. Marketers need the essential elements—market mapping, targeted solicitation, right resources and budget, process-oriented campaign management, consistent effort, and a little bit of luck (like good weather in farming) to ensure a successful fundraise. Despite being arduous and time-consuming, a successful fundraise is distinctly achievable by focusing on processes and adapting best practices from successful marketers and marketing campaigns.