Today’s emerging managers – the challenges
Managers must grapple with a multitude of issues including geopolitical unrest, inflationary pressures, the lingering effects of COVID-19 and market volatility. Within this complex environment, emerging managers find themselves heavily reliant on broader market conditions, exacerbating their difficulties. Additionally, sponsor exits, valuation uncertainties, and limited liquidity further compound these challenges. LPs may exhibit caution towards first-time funds, hindering a manager’s ability to forge connections, raise funds, and establish a robust track record. We have set out below some of today’s key challenges, and their solutions.
Costs
Emerging managers in the private fund industry face significant challenges when it comes to launching a fund due to the high costs involved. Firstly, the increased regulatory compliance requirements impose substantial financial burdens. Compliance entails legal fees, registration costs, and ongoing regulatory reporting expenses, which can be particularly daunting for smaller firms with limited resources. Additionally, establishing infrastructure such as trading systems, risk management tools, and back-office operations necessitates significant upfront investment. These costs are often beyond the means of emerging managers, constraining their ability to compete with established players.
Marketing and investor relations also require a large amount of capital. Building an attractive track record, participating in roadshows, and engaging with potential investors often on a global level, entail considerable expenses. Without an established brand or performance track record, successfully obtaining investor capital becomes ever more challenging. On top of this, there are then the operational expenses, including office space, technology, and staffing, which further add to the financial pressure.
The competitive landscape highlights these challenges, as institutional investors often favor larger funds with a longer and more proven track record and a robust infrastructure. As a result, emerging managers are finding it difficult to gain the necessary traction and achieve economies of scale, maintaining a cycle of financial restrictions.
Fundraising
Fundraising can be daunting; unlike established firms, emerging managers lack a track record, making it challenging to attract investors. Building credibility necessitates transparent communication, a compelling investment thesis, and an established framework of personal connections, to secure initial capital commitments.
Operational infrastructure
Operational infrastructure presents another hurdle. Setting up robust back-office systems for trade execution, risk management, and reporting requires significant investment. Moreover, insourcing these functions can strain already limited budgets, forcing emerging managers to strike a delicate balance between cost-effectiveness and operational
Talent acquisition
In addition, talent acquisition poses problems; attracting and retaining skilled personnel is crucial for executing investment strategies effectively. However, competing with larger firms for top talent can be difficult due to budget constraints and the allure of established names within the industry.
Market competition
Market competition further complicates matters. The private fund landscape is crowded, with established players dominating investor attention. Standing out requires differentiation through unique investment strategies, specialized expertise, or a niche market focus.
Investor expectations
Managing investor expectations is critical. Emerging managers must balance the desire for high returns with the need to manage risk prudently. Establishing realistic performance benchmarks and maintaining transparency are essential for fostering trust and long-term investor relationships.
Macroeconomic factors
Macroeconomic factors and market volatility add another layer of complexity. Economic downturns or unforeseen market events can test the resilience of emerging funds, underscoring the importance of robust risk management practices and adaptive investment strategies.
Solving today’s challenges
Costs
Emerging managers in the funds industry can look to offset significant costs by leveraging technology for operational efficiency, outsourcing less “core functions”, and creating strategic partnerships. One such example is the utilization of cloud-based platforms for trading and data management which in turn reduces infrastructure expenses. Outsourcing tasks including compliance and back-office operations can also lower overhead costs for the manager. By collaborating with service providers and joining industry associations can provide cost-effective solutions for marketing and aid investor relations. Additionally, focusing on niche markets or strategies where they have a competitive advantage can optimize resource allocation and create increased investor interest, all together reducing a significant amount of the financial challenges associated when launching a fund.
There has also been an increase recently with new managers launching as a Cayman SP on an existing SPC, as another way to provide flexibility, cost-effectiveness, and speed to market for emerging managers. There is also an option for them to create their own SPC structure to add new segregated portfolios for separate investment strategies to it when they feel that the time is right.
Given their popularity, SPC platforms are often labelled “Emerging Manager Platforms” and are being offered more frequently by the fund administrator and governance firms as an optimum solution. Other benefits to them include reducing the increased regulatory burdens and aiding a time sensitive fund launch, when compared to the traditional standalone framework.
Approach to fundraising: institutions are now more discerning when selecting General Partners for investment management, amidst a heightened demand for limited capital. Managers are finding it necessary to cultivate investor relationships well in advance of fundraising, shifting from the previously sufficient six-month timeframe to a two-year lead time. This proactive engagement means ensuring regular ‘check-ins’ every six months to ensure investors are kept abreast of the manager’s objectives and timelines.
Efficient operational infrastructure: building a robust operational infrastructure is essential for managing risk, executing trades, and meeting regulatory requirements. Investing in scalable technology solutions, including the use of AI and Blockchain and outsourcing non-core functions are some of the ways managers can enhance their operational efficiency, allowing them to focus on generating alpha and serving investors.
Focusing on talent acquisition and retention: attracting and retaining top talent is vital for executing investment strategies effectively. Offering competitive compensation, a supportive work environment, and opportunities for professional growth can help emerging managers assemble a skilled team that can deliver strong results.
Market competition – differentiated investment strategy: developing a unique and compelling investment strategy tailored to capitalize on market inefficiencies or emerging trends can set emerging managers apart from established competitors. A clear and innovative approach can attract investor interest and lay the foundation for long-term success.
Investor expectations – transparent communications: establishing open and transparent communication channels with investors builds trust and credibility. Providing regular updates on fund performance, investment decisions, and market outlooks fosters strong investor relationships, which are crucial for fundraising and long-term success.
Adjusting to macroeconomic factors – adaptive risk management: developing a dynamic risk management framework that can adapt to changing market conditions is critical for preserving capital and generating consistent returns. Implementing rigorous risk monitoring processes, stress testing scenarios, and portfolio diversification strategies can help mitigate downside risk and enhance the resilience of the fund.
Next steps – selecting the right service providers
Selecting the right service providers is key to the long-term success of a fund. Emerging managers are faced with the daunting prospect of finding the right provider, amongst a wide array of options. By outsourcing critical operational activities, managers can access best-in-class expertise and technologies to improve insight, gain efficiencies, and create a scalable infrastructure. It’s important to partner with a provider that has specific industry expertise and a focus on providing a high-quality, personalized service. Types of service providers may include:
Legal representation: the right legal firm will ensure that your fund documents are correctly drafted, including the formation of the fund, the General Partner and the management company.
Accounting: a reputable accounting firm will guide you through the various financial, compliance, tax, and operational considerations.
Fund administrator: partnering with a fund administrator that has experience with your specific fund structure and investment strategy is essential. Services include the preparation of records, calculation of NAV and investor services such as conducting AML checks on prospective investors.
Prime brokers: these services include the execution and clearing of trades and custody of cash and investments. It is worth noting that prime brokers will often maintain advisory or consulting divisions that facilitate connections with accountants, attorneys, insurance firms, bankers, and other service providers, alongside offering capital introduction services. FundBank has recently collaborated with Interactive Brokers to provide a seamless, next-generation trading experience designed exclusively for the asset management industry. With cost efficient trading and professional pricing, emerging managers can access more than 150 markets in 33 countries through its advanced trading technologies.
The right bank: at FundBank, we work closely with emerging fund managers and their administrators, ensuring that their investor funds are custodied safely so that they can focus on managing their portfolios and generating alpha. At FundBank, we pride ourselves on being at the forefront of innovation in the banking industry. Our fully digitized onboarding experience is one such innovation, allowing emerging managers the ability to open and manage their accounts in a way that is both efficient and convenient for them.
Summary
Emerging managers launching new funds often find themselves time constrained when addressing key structural and operational considerations, posing real risks both in the immediate term and as their fund platform evolves. They face a multitude of complicated challenges; overcoming these requires resilience, adaptability, and a strategic approach. Managers must not only consider the operational necessities, but they must also ensure the selection of solid service providers who will execute these ongoing functions and, in turn, support the growth of the fund.
At FundBank, we work with newly launched funds and those that have been in existence for many years. Each client is unique, and we are pleased to be able to work closely with emerging managers when it comes to helping them to navigate their trading, custody, and banking requirements.