Success raising assets requires a qualitative and quantitative “pipeline”.
Building and maintaining the “pipeline” requires identifying sufficient numbers of the “most suitable” prospects (given the manager/fund profile) along with qualification and appropriate engagement. No new or smaller manager/fund can have any expectation of success raising assets without a “proper pipeline”. Most new and smaller managers, especially those with AUM less than $25 million, have a ‘mythical’ pipeline along with an unrealistic expectation of immediate and sustained success raising assets simply based on investment performance. Far too often, the list of “prospects for pitch” is filled with “non-existent unicorns” i.e. institutional investors, allocators or family offices that are willing and able to invest a large sum in a manager/fund with an extremely small asset base or the same investors willing and able to allocate an amount that exceeds 10% of the fund’s AUM. A 10% concentration limit is often a stipulation of an institutional investors investment policy.
According to research from Preqin, “only 2% of hedge fund allocations go to managers with less than $100 million AUM“. To that end, an important AUM hurdle is $100 million, the credibility threshold. At that level, serious institutions and family offices begin to view the manager/fund as a ‘credible’ option. Crossing the “credibility threshold” as quickly as possible has emotional, psychological and tangible significance for investors as well as the fund’s eco-system.
To that end, the average annual pipeline conversion rate for new and smaller funds is 3%-5%. Therefore, a fund with a minimum investment of $1 million must eventually “close” 100 prospects to attain “credibility“. A closing rate of 5% means the pipeline has to be “maintained” with a minimum of 2000 “suitable and qualified” investors, who are consistently and appropriately engaged on a “prospect-specific” basis.
Furthermore, research shows that a new or smaller fund must have a minimum of 200 “quality” face-to-face meetings to gain the traction necessary to achieve success raising assets, a significant challenge in the COVID-19 climate. Additionally, there is a cost associated with prospect engagement. No free lunch exists. The average all-in-cost of proper pipeline management within a fund’s geographic and relational footprint, the GRF, (what I pound the table about!) typically prospects within 3-hour drive radius of the manager/fund, is $275-$325 per prospect, which means annual cost of $65,000 (200 meetings x $325). Btw, the cost of marketing OUTSIDE a fund’s GRF is 10x more expensive! $2,750 – $3,250 per prospect.
However, most new and smaller hedge funds have no prospect pipeline process. As such, “76.4% ‘TAP OUT’ their network of investors within 1 year” according to research from accounting firm Rothstein Kass/KPMG. To make matters worse, not only do they “tap out” the network but “burn it out” as well, from inappropriate engagement with prospects. Failure to “qualify” prospects (gather prospect-specific information, insights and intelligence), “constant pitching” and trying to “close” too early, kill any chance of a RELATIONSHIP and an allocation, which is rarely won in the first meeting but can certainly be lost there! It’s similar to going for coffee on a first date and proposing marriage before even saying “hello”! That screams inappropriate, desperate and creepy! (Remember action notes of May 11/eharmony vs tinder and June 22/stranger danger).
What is the tactical action point?
Most new and smaller funds have no pipeline process. As a result, they don’t know how to “prospect” effectively, efficiently and economically. With traditional “pipeline build (prospecting)” in the form of in-person conferences and cap intro events limited due to COVID-19, the need for new and smaller manager/funds to have a structured, disciplined and focused MARKETING PROCESS that enables “proper qualitative and quantitative pipeline management” to build and maintain RELATIONSHIPS with the most suitable (“closeable“) prospects is even more critical. This process-based approach will optimally position a new or smaller manager/fund for the highly-relevant, high-impact “prospect-specific” engagement now mandatory to achieve the two (2) essential ingredients in the allocation decision:
TRUST and “ACTIONABLE CONVICTION”
As always, I hope you find this helpful.
Johnson & Company
Direct: (512) 786-1569 or [email protected]