INTRODUCTION

Months before his death in the spring of 2021, David Swensen, the legendary chief investment officer of Yale University, sent a letter to the roughly 70 fund managers handling the university’s more than $30 billion endowment.¹ He had been reflecting on the Black Lives Matter protests of the previous summer and decided that Yale would do its part in promoting diversity. Swensen’s letter required fund managers to complete a survey on gender and racial diversity at their firms, with annual updates. Firms that did not show an improvement in hiring women and minorities over time would risk their allocations being taken away.²

Getting a foot in the door at institutions like Yale is much tougher today for fund managers than during the industry’s heydays in the 1990s. Institutional investors no longer focus on having their portfolios managed by “star managers,” whose investment acumen is expected to generate market-beating returns. Name recognition alone is not good enough to convince investors to allocate capital to the fund manager, and as Swensen’s letter proves, neither is an excellent track record. Today, amid immense competition for investor capital, institutional investors look to the team, processes, strategy, and investment philosophy rather than rely on a single, brilliant individual.

GETTING AN EDGE

Successful marketing of alternative investments—often defined as assets that do not fall into conventional types like stocks, bonds, or cash—requires a specialized skill set that goes beyond traditional asset management sales. Many marketing books are too broad to address the needs of the industry, lacking contextual familiarity with investor wants, needs, sensitivities, and no-go areas. Overly broad customer relations paradigms are often impractical in an industry where significant risks and rewards abound, and the investor has little de facto control over the assets once the allocation is made to a manager.

Attracting deep-pocketed institutional investors is desirable, but few fund managers succeed in doing so. As such, most of the industry’s marketing professionals learn “on the job” by trial and error—an expensive proposition few firms can afford. The success of an alternative investment firm relies not only on investment prowess but also on the ability to raise and maintain assets. This book is a practical guide to building an alternative investment marketing program, adaptable to big or small firms.

To be sure, in a crowded field of more than 10,000 hedge funds and at least 18,000 private equity managers globally,³ investors may find it difficult to differentiate among similar funds. However, funds that are able to convey their “story” well will succeed in raising capital from investors.

To craft a highly effective marketing strategy for alternative investments, the key is to understand the investors’ investment objectives, sensitivities, restrictions, and decision-making processes—prior to designing and embarking on a marketing campaign. While it is impractical for a fund marketer to know every investor’s history and aspirations, some common threads exist based on the structure of the organization, as well as pertinent information that can be synthesized and acquired through research, and through public or commercial databases. Fund marketers need to design a thoughtful marketing and fundraising campaign based on the needs of their desired set of investors, instead of deploying a “spray and pray” approach.

PAYING IT FORWARD

For us, the authors, this book is a pay-it-forward, passion project. We are friends and industry colleagues, both of whom have spent over 15 years in the industry as investors and senior investor relations professionals. Much of our professional learning has been on the job, and we both have benefited from the coaching, mentoring, and advice received from friends, colleagues, and even LPs showing us the ropes. We have spent three years speaking with successful marketers, fund managers, allocators, service providers, and thought leaders in the industry to learn and collate best practices and standards of excellence in marketing alternative investments. Our objective is to share this collective wisdom with our readers.

We believe an investor-centric marketing and fundraising strategy is superior to product-guided fundraising, which is unfortunately the industry practice.

There are three major sections of the book:

1.   Fundamentals

Understanding your customer is the first and most important step in any marketing process. This section discusses the history, structure, decision process, stakeholders, investment expectations, regulations, and relevant information on major institutional investor groups.

2.   Fundraising in practice

This section gets into the tools, techniques, issues, regulations, skill sets, and processes required to complete a full marketing cycle from premarketing through investor relations. It covers a multitude of topics, techniques, and processes that fund managers need to build an efficient and effective marketing strategy and convert it into an actionable plan.

3.   Other considerations

The last section addresses key building blocks for a successful franchise in an evolving alternatives landscape. We talk about diversity, technology, and what we wished we had known when we began our careers in fundraising and investor relations.

We want our readers to:

•   Gain an understanding of marketing alternative investments and the stakeholders involved

•   Develop a process-oriented marketing plan that relies less on individual brilliance

•   Build an investor-centric sales strategy that is suited to investor and stakeholder needs

•   Improve marketing efficiency and effectiveness to add value at each interaction

•   Follow a marketing process that is not burdensome on stakeholders (limited partners [LPs] and general partners [GPs] and service providers)

While speaking with various industry thought leaders, we made an early decision to not linger on terminology when there is variability in usage along with a wide acceptance of different words and phrases that all mean the same thing—“alternative investments,” “alternative assets,” “alternative investment class,” and “alternatives” are all equally acceptable. Similarly, general partner (GP) and fund manager refer to the team or person who invests capital on behalf of a limited partner (LP), the asset allocator or investor who provides capital to a manager to invest on their behalf. We also have chosen to focus on two large sets of alternatives—private equity and hedge funds. However, note that most of the advice on private equity applies to a wide variety of closed-end fund structures with fixed terms in the private (not listed on an exchange) investments domain, including venture capital, buyouts, growth capital, and mezzanine finance. Similarly, in this book hedge funds refer to open-ended funds without a fixed term in the private investments domain. This is because:

1.   The primary differentiator while marketing alternative funds is open- versus closed-end structures. Many of the other factors—liquidity, cash flows, return profiles, fund terms—are all neatly structured within this construct. The limitless variance around a common structure does not radically impact the marketing of these funds.

2.   Other considerations that do impact marketing, such as regulations, are dependent on investment strategies that are too numerous for a single book to tackle. We aim to share best practices across alternatives, rather than offering guidelines specifically tailored for each and every strategy.

WHY ONLY ALTERNATIVES?

1.   Alternative investments are a large and rapidly expanding market.⁴

Total capital managed by private equity is around $5 trillion and is expected to grow to $9 trillion by 2025, which represents a 16 percent annual growth. For hedge funds, total assets under management were $4.3 trillion as of the second quarter of 2021. As the industry matures, there are new pools of capital around the world that are making significant allocations to alternatives for the first time. These range from large pension funds to smaller institutions and high-net-worth individuals. Furthermore, industry consolidation makes marketing an extremely critical component of success for midsize and small funds.

2.   Investors seek reassurance due to lack of transparency, control, and high dispersion of returns in alternatives.

a.   Traditional assets (such as equity and debt mutual funds, ETFs, among others) are transparent. Investors in traditional assets know the actual investments they are in, even if that is likely to change later, based on either a benchmark change or through active management by the fund manager. When allocating to alternatives, however, investors are committing capital to a blind pool. The main constraint is what the managers can invest in and how they can manage the investment. Furthermore, as alternatives are considered the domain of “sophisticated” investors with high risk tolerance, there is limited active regulation to protect them as compared to traditional investments.

The bottom line is that investors back a specific investment when they invest in traditional assets, and they back a manager (including their investment strategy, acumen, and trustworthiness) when they invest in alternatives.

b.   Alternatives are illiquid. Once investors make an investment, they have to wait until the lock-up expires (hedge funds) or there is an exit through a sale or liquidation from an investment (private equity) to get their money back, along with any returns. Further, the manager has complete autonomy regarding investment decisions within predetermined boundary conditions. This complete lack of control for investors means the cost of a choosing a wrong manager could be quite high.

c.   While the average investment returns for alternatives are significantly higher than those of traditional securities—which drive high investor demand—there is great dispersion in returns between top quartile and bottom quartile managers in the same asset class as seen in Figure I.1. A great manager in an unfavorable subcategory could significantly outperform an average manager in a favorable subcategory. Traditional assets have a much narrower range (less than 2 percent for debt and 3 percent for equity) when measured over 10-year periods.

FIGURE I.1 Average annual manager returns by asset class, January 1, 2007–September 30, 2021

Source: Cambridge Associates LLC.

Notes: Returns for bond, equity, and hedge fund managers are average annual compound returns (AACRs) for the fifteen years ended September 30th, 2021, and only managers with performance available for the entire period are included. Returns for private investment managers are horizon internal rates of return (IRRs) calculated since inception to September 30th, 2021. Time-weighted returns (AACRs) and money-weighted returns (IRRs) are not directly comparable. Cambridge Associates LLC’s (CA) bond, equity, and hedge fund manager universe statistics are derived from CA’s proprietary Investment Manager Database. Managers that do not report in US dollars, exclude cash reserves from reported total returns, or have less than $50 million in product assets are excluded. Performance of bond and public equity managers is generally reported gross of investment management fees. Hedge fund managers generally report performance net of investment management fees and performance fees. CA derives its private benchmarks from the financial information contained in its proprietary database of private investment funds. The pooled returns represent the net end-to-end rates of return calculated on the aggregate of all cash flows and market values as reported to Cambridge Associates by the funds’ general partners in their quarterly and annual audited financial reports. These returns are net of management fees, expenses, and performance fees that take the form of a carried interest. Vintage years include 2007–2018.

3.   Marketing is limited by regulation in most jurisdictions.

In the United States, prior to September 2013, alternative funds were not allowed to advertise. Given alternatives’ higher complexity, illiquidity, and risk profile, the restriction against advertising was to prevent fraud and to avoid solicitation of ineligible or inappropriate investors (nonaccredited). Even if funds attract investors without solicitation, managers have to confirm the accreditation or qualification status of the investor before engaging with them—adding to marketing friction when connecting with qualified investors. Similar restrictions are seen in Europe’s Alternative Investment Fund Managers Directive (AIFMD) and in Section 21 of Financial Services and Markets Act (FSMA) in the United Kingdom.

Even after restrictions were relaxed as part of the JOBS Act in 2013, broadly advertising for investors would be like looking for a needle in a haystack, given the narrow qualifications, making this type of advertising extremely inefficient. Therefore, marketing alternatives requires an ability to attract the right investors without explicit marketing. No such broad restrictions apply to traditional assets that rely heavily on mass advertising to promote their products.

4.   Alternatives are complex financial products that may rely on esoteric securities and strategies, as well as a manager’s skill set.

These skills include investment acumen, expertise in taking over and managing a portfolio company, ability to influence a target company (activist investing), capability to leverage capital markets for financial engineering or exiting an investment, and talent for deploying a plethora of complex structures and technology to generate investment returns.

Investors, however sophisticated and experienced they may be, are not subject matter experts in these strategies and need to be educated to be confident in and comfortable with an investment. Marketers of alternatives must be able to explain the product in layman’s terms, answer questions about the product and its associated risk profiles, while simultaneously making it appealing to investors. Part of connecting with the investor is building relationships and trust, part of it is pure salesmanship, and another is the ability to simplify extremely complex and risky products. The tools and techniques needed to succeed are vastly different from those of traditional assets.

In addition, an alternatives marketer relies on a direct relationship with a set of accredited investors and qualified purchasers who are highly sought after and constantly solicited by all kinds of fund managers (both traditional and alternative managers). To stand out in such a crowded market is a skill that few possess, but one that can be learned with experience and coaching.

5.   Most sales of traditional assets occur through distribution channels where the marketer is focused on intermediaries (like RIAs, retirement plans, and brokerages).

The marketer of a traditional investment product would build a relationship with the distributor and push them to promote the firm’s products. There is no real direct sales relationship to speak of between the fund manager and the investor, other than with intermediaries or large institutions. In contrast, the alternatives marketer relies on direct relationships with a set of accredited investors (including qualified purchasers) and institutions to sell their products and services.

A FINAL NOTE

There are plenty of reliable and well-researched books, guides, and journals addressing the investing function in alternatives. Yet there is a conspicuous absence of reliable books and guides addressing other functional areas that are necessary in a maturing alternatives industry—including marketing and fund operations. Our goal is to close the gap and provide a comprehensive and authoritative primer on alternatives marketing and capital formation that encompasses fundraising, investor relations, brand management, ethics, and public relations.