In any field, starting something new can be daunting. If you’re reading this, you no doubt know the level of uncertainty that comes with the process of creating an investment strategy. Networking, making connections, and learning the ropes early on in any career can be daunting, but in a space as large and complex as institutional investments, it can be even more overwhelming.
At Dakota, we’ve been in the field for nearly fifteen years, and have worked across platforms to raise over $35 billion in that time. We know a few things about getting investment strategies off the ground. We realize that setting realistic goals and making connections with the right people early on is critical, and can help guide emerging managers and show you the ropes as you’re getting started.
In this article, we’ll outline five things that all emerging managers should know as they start establishing themselves and their strategies to go to market.
We’ll cover everything from the definition of a true “emerging manager” to the must-have marketing materials so that you have an idea of the whole picture as you get started. You’ll come away from this article with a step-by-step plan of attack, so that you’ll be as successful as possible, as quickly as possible.
An “emerging manager” means different things to different people, but simply put, it’s a portfolio manager who is early on in their growth cycle. Emerging managers typically have a smaller asset base and a shorter track record, and are trying to grow their business.
The definition of an emerging manager also differs when you talk to different types of allocators. So while the term “emerging manager” is used across the industry, it can mean anything from asset management range (less than $2 billion in assets), to tenure (anything less than five years in the field is considered an emerging manager). Additionally, firms that are minority or women-owned are considered emerging managers.
So, while there is no concrete definition of an emerging manager, it varies among different allocators, it’s largely determined by three factors: assets, track record, and ownership.
Next, we’ll go into the steps necessary for an emerging manager to establish themselves in the field.
This starts with identifying and deciding on a core competency. In other words: what is your edge? What is it about your strategy that sets you apart?
It’s important to decide this early on and stick to it. Performance will fluctuate over time, but your philosophy, and how you manage risk should not. Being thoughtful about this early on is crucial.
Our advice? Don’t try to be all things to all people.
We’ve seen a lot of smaller managers try to make themselves fit within every specific strategy, and while this can be appealing at the moment, it can ultimately end up being a distraction from your overall strategic goals. Ensure that you have a plan for what your core strategy is and focus on growing that rather than building a platform business from the onset.
As you set this vision, it’s also important to build credibility through audits and compliance.
When you’re just starting out, it’s critical to make sure that your performance track record is GIPS-compliant. This allows you as the investment manager to provide allocators with the confidence that your performance has been audited and is accurate. This is something that most money managers are required to do, and the sooner you can get this started, the better and more established you will appear.
As a small firm or fund with a short track record, you won’t be able to go to certain channels like banks or broker-dealers. It’s important to realize this and to be realistic about where your strategy is a fit, or who can be utilizing your strategy.
Prepare for a three-year sales cycle, and expect limited growth for the first three years after launch. It typically takes up to or over three years to create a portfolio and a return pattern, so knowing that going in is important.
Since it will take up to three years to start meeting with investors, be sure to take fees into account.
Large public pension plans and investment consultants have emerging manager programs, which means they will allocate to a newer or smaller strategy at a lower fee base than they would a more established strategy. For example, a traditional U.S. equity strategy fees can range from ten basis points to thirty basis points
Make sure your product structure is aligned with the underlying strategy: does the liquidity make sense?
Separate account vs. LP vs. mutual fund. Make sure the product structure fits the underlying strategy and that the product strategy drives your distribution strategy. This means that you’re calling on the people that actually access your strategy through the right vehicles.
At the end of the day, it’s crucial that you have a plan. Create a separate account and market that, and then create a mutual fund and pre-market that. Don’t launch a specific product vehicle without client demand.
This means going to existing relationships to help seed product structures like mutual funds. This will save you not just time but money. Most mutual funds need at least $25 million in assets to break even. If you don’t reach that level, it can become an extremely costly venture.
In the past, we’ve seen firms and managers go to custodians (Schwab, Fidelity), and consider that a source of assets. However, before you go to those custodians, we recommend gathering demand and having an underlying investor put you through the process of getting on those platforms.
Because of the three year threshold for emerging managers, many managers feel that they can’t start marketing themselves and their strategy until they hit that three-year mark, but this is a common misconception. You’re doing yourself a disservice by waiting until you’re ready to start setting up meetings to start marketing. This will also delay the time it takes to start raising money for your strategy.
Instead, lay the groundwork early on, so that you have a pipeline ready to go when you do meet that threshold.
When you start marketing early on, you are also able to set and manage expectations. This way, allocators will already be familiar with you and your strategy, allowing you to move much more quickly than if you had waited to start marketing.
You might be wondering how to effectively market a new strategy, and we’ve seen success in a few ways.
At Dakota, “know who to call on” is a phrase we live by.
For emerging managers, knowing who to call on can mean everything from identifying the funds that have emerging manager programs to finding allocators who invest in your strategy through the right vehicles.
Building relationships with the right people early on helps lay the groundwork for future investment opportunities.
Having access to an institutional investor database can help you identify those people as you’re starting out so that by the time you’re ready to start setting and holding meetings, you’ll know exactly who your target audience is, and whether or not they invest in emerging managers.
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