CHAPTER 6

Premarketing and Marketing—an Overview

Marketing is critical to a fund’s success. You may believe above-average returns are enough to attract investors, but this is a misperception. It is not uncommon to find a fund with superior performance failing to attract investors. This is often due to poor marketing.

The good news is that marketing alternatives is a craft that can be learned. As with any craft, you learn from those who are adept at it, but master it by practicing. No amount of independent study or listening to experts will teach you as much as doing it yourself. Before you go to battle, you need to arm yourself with the tools necessary, and in this book we will explore them with you. Once you are comfortable with the fundamentals of fund marketing, you will be able to adapt these methods to suit your personality, capability, and needs.

Fund managers (GPs and related persons) need to familiarize themselves with the expectations of investors, both institutional and high-net-worth individuals (HNI). A good starting point is the Institutional Limited Partners Association (ILPA) private equity principles, which seek to align the interests of funds and their institutional investors. These guideposts, which are equally applicable to other alternatives, were developed in response to the 2008 financial crisis. This crisis exposed the deficiencies of both funds and institutions in executing their fiduciary and functional responsibilities. Such scrutiny resulted in many improvements to investor relations (IR) functions that we see today—better transparency, governance, stewardship and adherence to fiduciary duties. (Note that marketing and IR are related but distinct functions, even if they are performed by the same individual or team. Chapter 11 will discuss IR’s influence on marketing.)

Here are the ILPA principles anchoring IR practices in private equity:¹

1.   Transparency. Transparency not only means sharing information that is timely, accurate, and detailed to meet the needs of investors, it also requires the disclosure of fees, calculation methodologies, justification for expenses incurred, and timely reporting of nonroutine regulatory and policy violations.

2.   Alignment of interest. Conflicts arise when the interests of funds and investors diverge. To minimize disagreements, resentment, or ill will, ensure terms are reasonable, underlying economics duly incentivize performance and equitably distribute profits, and partnership conditions are not onerous to or shortchange either party.

3.   Governance. Given the level of autonomy and information asymmetry that favors GPs over LPs, put mechanisms in place to ensure there are clear boundaries around what is acceptable. Furthermore, there should be a mechanism for enabling proper monitoring and remedying a situation should there be a disagreement or potentially contentious situation that could arise between the two parties.

We highly encourage managers and investors to thoroughly familiarize themselves with the best practices outlined in the latest ILPA principles document.

PREMARKETING

Marketing is a continuous process in alternatives, it never really stops. For example, while some hedge funds may temporarily pause or close to new capital once they reach certain target AUM levels, most are in constant fundraising mode. In the case of private equity funds, the next fundraise often starts even before the current one is completed. Successful marketers are those who focus on the current fundraises and are always working toward the success of future fundraises. This process, premarketing, is a key ingredient of a successful marketing function in alternatives.

Reasons to premarket:

1.   Timing mismatch. An LP may be unable to invest today while being genuinely interested in the fund. Some factors that may temporarily preclude an allocation include current liquidity levels, sufficient exposure to the asset class, and limited time to perform the requisite due diligence. These are excellent opportunities for a marketer to nurture their interest and lay the groundwork for future allocations.

2.   Informational interviewing. Premarketing is a soft-sell strategy that could create benefits in the long term. LPs appreciate being able to learn about the fund without every meeting turning into a sales pitch. This two-way exchange is also an opportunity to learn about the GP before making a commitment, which is also known as “investment dating.”

3.   Building relationships without fundraising pressure. It is better to have initial conversations with LPs when they know you are not there to make a marketing pitch, rather than only reaching out to LPs during a fundraise. They will be less guarded and more receptive to a manager or marketer investing time and effort to educate them as part of relationship-building. Institutions appreciate the time spent to learn about the strategy, fund, and team well ahead of a fundraise, so they can have greater confidence about their investment decision and feel comfortable with the GP. To build credibility over time, be transparent at the outset and communicate in a manner that is consistent, reliable, and persistent (but not intrusive).

What Do You Need to Start Premarketing?

Premarketing by nature is unstructured; there is no specific requirement from LPs other than the willingness to learn about the manager. Most GPs start with existing pitchbooks and investor updates as the basis for a conversation. Updating information presented in older pitchbooks prior to meeting investors is a good practice; it shows commitment to the process and a genuine effort to bring them on board for the next fund.

GPs should approach fundraising as a resource challenge. Optimize the capital raise given the constraints of time and money. While you may be able to convert an LP that has never invested in your asset class or strategy, this effort may prevent you from targeting investors that are ideal for you and already looking to allocate to your strategy.

A common and potentially costly mistake while fundraising is not keeping LPs engaged. Fundraising is a hectic and time-consuming part of the asset management business. For most GPs, it is a distraction from their core competencies and responsibilities, but is essential to keep the wheels of the firm running. New managers often view a meeting with an LP as an accomplishment instead of identifying it for what it really is—moving the ball a little closer toward the goal post. The GP interview does not end after the meeting either; it has just begun.

Unless there is an outright rejection from an LP, keep the conversation going without being intrusive. After a meeting, send thank-you notes, and follow up with responses to questions raised or any additional information promised to an investor. In addition, obtain permission from the LP to provide regular updates and fund letters, so that the engagement continues as you provide a better understanding of your fund, strategy, and the firm. While adding LPs to the email distribution list keeps them updated and reminds them of your fund, active engagement is more fruitful, moving them toward an investment. Seasoned fund marketers regularly provide quick updates and call investors occasionally to re-engage with them, without rushing them to commit.

Investor communication best practices:

1.   Reach out when there is something genuinely important to share, such as a new deal, an exit, a write-up of an existing investment, an investment from a prominent LP, significant outperformance over the benchmark (hedge fund), an addition to or even departures from the team.

2.   Do not request in-person meetings too frequently. You want to avoid meaningless meetings that do not add value to the LP.

3.   Informal and unplanned engagements can be opportunities for candid conversations with LPs—these include coffee breaks, cocktail hours, meals, and other encounters at conferences.

It is good practice to have continuity in your interactions with LPs. Most large funds divide their investor list among IR and sales teams to help provide such continuity. By having a primary point of contact for each LP, it is easier to build stronger relationships and monitor changes to sensitivities and preferences over time.

TYPICAL MARKETING PROCESS

Essential questions for a fund manager to address as part of the marketing process include:

1.   Assessment:

•   Who are your current LPs? What is the composition by investor segment? What is the investor concentration—top 5 and top 10? What is the geographical dispersion of current LPs?

•   What has been their investment experience? What was their alpha compared to a benchmark (hedge funds) or internal rates of return (IRR) compared to the public market and industry? For closed-end funds, what were their multiples of invested capital (MOIC), exit experience, and distributions? Where do you stand against your competition—what is your track record and is it an advantage?

•   For private equity, what percentage and number of LPs will re-up (existing investors committing capital to the new fund), and at what amounts (higher or lower than their current capital commitment)? For hedge funds, are they likely to increase or decrease allocation in the coming years?

•   Are LPs supportive of the new fund (private equity)? Is there LP concern about fund size growing too large to impede good returns?

•   How many LPs who declined to allocate in the past could be persuaded this time around? What were their concerns, and have they been addressed adequately? If not, what should be done?

•   What will be the biggest obstacle to raising capital for the new fund?

•   Map out the team’s strengths and compare them to the competition.

•   Address the most important question: what is your unique selling proposition (USP)? What proof do you have to substantiate your claims?

•   Why should an LP allocate to you and your strategy?

2.   Desired state:

•   What is the ideal size of the fund?

•   What is the desired LP composition by segment, geography, and concentration?

•   Create a target list of ideal and desired LPs.

3.   Gap analysis:

•   Has the anchor been identified?

•   How many new LPs should the fund attract? What are the desired characteristics? What is an ideal check size or investor AUM range to target?

•   Does the team have bandwidth to execute a strong fundraise? What additional resources are needed?

•   Is performance superior enough to attract on-the-fence LPs from the prior fundraise and new targets?

•   Are the relationships with target LPs sufficiently deep and broad? If not, is the solution to start building relationships now, to use a placement agent, or both?

•   Do inadequacies in the documentation or communication exist? Can this be resolved before a fund launch?

•   Is there a need for a strategy recalibration or modification? Will that be received well by current LPs? Will that make it attractive to new LPs?

•   Can all members of the team tell your story spontaneously to LPs? Which members are excellent storytellers who can provide in-depth information to LPs to aid in their due diligence, and who needs significant coaching and practice?

•   Are there additional institutional, organizational, or regulatory issues that should be remedied prior to the launch?

4.   Planning and budgeting:

•   What is an ideal budget versus the actual budget? What are key priorities and compromises?

•   Which current LPs are likely to provide referrals and references? Who is on the fence about making an additional investment, and how can they be convinced? Who might redeem their investment (hedge fund) or not re-up for the next fund (private equity/venture capital)?

•   Where should roadshows be organized? Who will be the “host” LPs for the roadshow? Can an LP event be organized to connect with a larger group of LPs?

•   Are there conferences that will attract desired LPs? Are these ideal venues to make introductions? Do these conferences have speed dating sessions to meet new LPs?

•   What is the time commitment from the investment and operations teams? How can that be streamlined to be more impactful?

•   What is the expected timeline and what are key milestones?

•   Where do you plan to market the fund? What are the regulations and how do you ensure compliance? (Ensure all documents are approved by counsel before launching or sharing.)

•   Create all marketing documents and presentations, but secure their confidentiality through data rooms and access portals that are trackable. Make the content available to prospects, and monitor its use, revoking access once an investment decision is made. Follow up if LPs do not access the information in a timely fashion to confirm interest in the fund.

5.   Execution:

•   Is every LP you are reaching out to an eligible investor, and do they have a good reputation? Conduct a quick background search (e.g., Google, LinkedIn, common connections) on the LP and the individuals with whom you will engage.

•   Do you understand the organizational structure of targeted LPs? Find out if they have the resources and experience to understand your fund’s strategy and goals, conduct appropriate due diligence if interested, and invest.

•   Have you identified the right people at the investor firm for you to direct the initial pitch? Seek referrals, if possible, to make the connections count.

•   Do you have a good understanding of the LP’s motivations and concerns? Figure out if the fund is a right fit for the LP’s objective and portfolio.

•   What is the goal of the interaction? The objective for each step is to move the ball forward toward the end zone. As long as there is progress at each interaction with the investor, consider it a success. Trying to rush the process will create additional risks and lead to an “interception” instead of a “touchdown.”

•   Do you have a process to maintain engagement after the initial contact? Interact with potential investors regularly, and report both good and bad developments with consistency and transparency.

•   Have you assessed how often you want to reach out to the prospect? Regular interaction does not mean reaching out incessantly. Do not pester the LP. While there is no hard and fast rule about how often to make contact, it is helpful to read the room and pick up on social cues. Simply asking the LP how often they would like an update solves this problem.

•   Have you provided all information the investor would need to make a decision? Due diligence should be conducted to confirm facts; it is not an information-gathering process.

•   How do you ensure there is knowledge sharing and responsibilities assigned for follow-ups with LPs? Document all interactions, questions, feedback, and recommendations from investors and other stakeholders (placement agent/consultant). Designate team members who will “own” the tasks and requests from LPs, along with specific deadlines. Do not drop the ball, especially during the marketing phase.

6.   Process conclusion:

•   Ensure all documentation is complete, and the fund administrator confirms the LP’s investment.

•   Keep engaging with the LP; do not move on after getting the check. How you conduct yourself after the LP’s funds are received will be an important factor in allocating to your firm in the future.

•   If there is a separate IR team, ensure there is a seamless handoff, but stay engaged to maintain the relationship with the LP. Referrals from LPs are a common occurrence.

While there are clear differences in marketing a hedge fund versus a private equity fund, the underlying principles are the same. The primary differences are contextual and not fundamental; they both strive to raise capital until they reach capacity. While hedge funds do not have a time frame to reach capacity—and can reassess and modify the capacity ceiling—that is not the case with private equity, which has a deadline to raise targeted capital. Private equity firms generally start another fund if they go past the capital target, whereas hedge funds can continue to add capital to an existing fund. However, both pause fundraising once they reach their fundraising goals and immediately pivot to premarketing.

One significant structural difference is that private equity funds will not seek replacement capital for redemptions until the investment period ends, whereas hedge funds will constantly raise replacement capital once the initial lockup ends. The economics of a private equity fund allow for a revenue floor (minimum guaranteed revenue for the firm) for the fund life, which allows a fund to manage its operations, including the marketing budget, better than a hedge fund that has no such guarantee. (This is also the reason why a larger percentage of hedge funds go out of business than private equity funds.) On the other hand, the fundamentals and structure of marketing hedge funds and private equity funds are similar. A good fundraiser can succeed in both, provided they have the relationships and adequate knowledge about the strategy they are selling.

For private equity funds subject to cyclical marketing, having a strong first close and developing fundraising momentum are critical to success. Before a marketing campaign begins, the fundraising team needs to establish the objectives of the fundraise and obtain internal buy-in. This includes agreeing on (1) the size of the fundraise, (2) whether the fundraise intends to actively change the investor composition—which may be an important issue to address as the fund matures from a primarily high-net-worth customer base to one that skews more institutional—and (3) entering into or expanding in a new geography.

The idea is to ensure that clear goals are shared by everyone working on the fundraise, and that adequate and appropriate resources (both staffing and budget) are dedicated to improve the probability of success in reaching the target. However, when it is a choice between turning down an LP who does not fit nicely into the target bucket or does not meet the fund’s size goals, the GP will almost always default toward taking the investment.

As for a “shooting darts in the dark” versus a targeted approach, aiming to reach all potential LPs might seem like a good option and may be appropriate in some circumstances, but it is no different than telemarketing. The conversion rates will be very low, and a great deal of effort and resources need to be dedicated to make any meaningful impact toward reaching fundraising goals. This approach might turn counterproductive and send marketers on wild goose chases. Instead, it would be more productive to focus initial conversations on learning about the investor’s goals, policies, allocation, decision process, experience with strategies similar to yours. Marketers should also identify relevant decision makers and influencers.

GPs should consider the size of an investment and other constraints that might be present. For example, an LP that typically writes $50 million to $100 million checks with a restriction that their investment cannot comprise more than 10 percent of a fund will not be a good candidate for a $250 million fund, even if the strategy is a perfect match for the LP’s objectives. Gathering such information early on will help the GP decide if pursuing the LP will make sense.

GPs should also identify, as early as possible, an LP’s specific conditions for investment, criteria for evaluating a manager, whether there are specific allocation buckets the investment or strategy must fit into—and if those are hard constraints or if there is flexibility. This information will dictate the level of effort spent on marketing to the LP.

For instance, the GP will find it hard to convince an LP to allocate capital to a strategy or geography where it has no experience or expertise (e.g., a Brazilian investment when the investor has not invested in emerging market funds). Even in cases where you are able to convince the LP to make an investment, the effort and time needed to educate the client about the strategy and risks will be substantial. On the other hand, if your fund strategy happens to be one in which the investor is actively seeking to gain exposure, it would be an easier fit.

LPs spend considerable time and resources researching a GP before they make an investment. Therefore, it will be helpful to know whether you are a new addition to a portfolio or replacing another manager. If it is the latter, you will have a higher bar to scale, as the prior manager already has a relationship with the investor and has undergone due diligence.

HOW TO EFFICIENTLY REACH NEW INVESTORS

MARKETING TIMELINES

Private equity funds face time constraints, which means marketing efforts have set timelines. While there is no specific time limit until the first close, the partnership agreement will specify the length of time between the initial and final close. A common time frame for most private equity funds is 12 to 24 months. If there is a delay, the GP must obtain LPs’ consent for fundraising extensions. Premarketing, on the other hand, should be a continuous process for an existing GP. For new managers, it should ideally be conducted at least 12 months prior.

SCREENING PROSPECTS

Should GPs or marketers spend an inordinate amount of time with LPs who have significant exposure to their competitors? If they agree to meet, this shows that the LP is interested, but know they may probably have enough exposure to your strategy and may not allocate more. The LP might be interested in meeting with you purely for benchmarking and market survey purposes. It may be imprudent to spend too much time with the LP in such cases, even if you want to be on the radar for a future allocation. In response, conduct the initial screening or LP qualification call, and then assess the situation.

Are they trying to replace a manager? How do you stack up against other managers (if that information is shared or knowable)? Most LPs are quite candid about their intentions if you ask them the right questions, although very few may volunteer information without a prompt. After discussing the LP’s motivations, needs, concerns, and investing experience with your asset class and strategy, most GPs will be able to discern whether additional effort with that LP is warranted. Use the information you gathered to prepare your team for follow-up meetings with the LP, and ensure your marketing materials and presentations are effective in addressing any requirements and concerns.

Be prepared with additional information that may be necessary to take the engagement further. More important, if an LP has questions and concerns that only certain people outside the usual group of presenters can answer, make sure to include and prepare them for the meeting. For example, if an LP is concerned about company integration in a roll-up or platform strategy, include the operating partner when meeting the LP. Just the presence of the partner is a good signal to the LP that you are actively engaged and responsive to their needs and concerns, which will further deepen their trust in you and your fund.

REACHING OUT TO THE RIGHT PEOPLE

If you cannot connect with people who serve as a referral, reach out to those in your network—someone you met at a conference, share the same alma mater, or enjoy other common connections. If you resort to a cold call, it is best to reach out first to decision makers in your asset class. Just like in investing, there is a top-down and bottom-up style to managing investment offices. However, while the top-down approach is common among HNWI and SFOs, it is less obvious in institutions. While marketers can reach out to decision makers, they should expect, moving forward, daily interactions will occur with members of the investment team.

Typically it is the marketing team that reaches out to new contacts, unless they are referrals to a specific individual at the manager level who would then do the follow-up. If several people have relationships with the targeted LP, the person with a first- or second-degree connection might initiate the contact. Other ways to develop contacts would be connecting at conferences, conducting speaking engagements, and participating at other public events. The contact could be the person who represented the company; otherwise, find contacts from publicly available information.

We emphasize that it does not matter who initiated the contact or who was the first point of contact at the investor firm. Ideally, it should flow through the marketing and IR teams and some common repository such as a customer relationship management (CRM) system. Subsequently, it is entirely dependent on LP preference and GP availability. While it is impractical for a small investor to seek regular engagement with the most senior partner or even the investment team on a regular basis, a sizable LP that writes the largest checks for the GP will likely receive favorable attention.

CONCLUSION

No matter who reaches out to whom, common tenets apply to any marketing effort: know your customer. Marketers will be severely handicapped in their efforts without understanding the LP’s investment philosophy, policies, institutional sensitivities, decision criteria, assessment process, key players, investment exposure or liquidity, and experience—both positive and negative—investing in similar strategies.

In the next chapter, we discuss how marketers can set up a systematic process to maximize the team’s impact, among other tasks and priorities.