The Investor Universe

Doing research to identify prospects

Originally published in the March 2011 issue

Two and a half years ago, I began cold calling for Brighton House Associates. I was given a list of firms, and I was to find each company’s phone number and the appropriate contact, and then connect with that person. It seemed straightforward, so I jumped in.

I found it usually took me ten to fifteen calls to connect with someone. And my hit rate was low—1-2% of the companies on my list turned into prospects. But I believed it was strictly a numbers game—the more calls I made, the more prospects I’d get—so I persevered. I did this for about six months. Then I began to think there had to be a better way. More out of curiosity than anything else, I began Googling and researching the firms before calling them. Then I began Googling and researching the person I hoped to contact. I found that a little background information went a long way on a call, so I dug deeper.

I researched the target firms’ competition, searched for contacts on LinkedIn, and created a profile form where I tracked all the information I found. Not only did my calls with targets become more productive, but when I left voice mail, I was able to leave messages that resonated. The day someone called me back, I knew I was on to something. As I researched names on my list, I also found new names to add and I became more creative in my sleuthing. For example, one day I came upon the name of a person at a family office. I had an e-mail address and the firm name, but I had no phone number and no address. There was no website. Where should I start?

I decided to look up the domain name. Sure enough, I came across a domain registration form, which had the firm’s address. I Googled the address and found the building directory online. What luck! I looked through the list of companies. Nothing. The name of the family office wasn’t listed. But the name of another company rang a bell. I checked it out and my hunch was right—it was the name of the company that was sold, the event that spawned the creation of the family office. I noted the number of the company and made the call. My contact’s first words were, “How did you ever find me?” We had a great conversation and the office became a prospect.

The moral of the story is simple. Cold calling is a numbers game, but researching targets improves your odds. The research can be time consuming and tedious, but it also can be creative. And it certainly is more rewarding. Not only has my hit rate improved to 5 to 10%, but I also enjoy cold calling a lot more.

Avoiding frustration

A $50 million hedge fund is looking to aggregate assets, so it spends weeks calling university endowments and US government pension plans. An established $750 million hedge fund wants to expand its long-term investor base and grow its fund to $2 billion, so it diligently pursues funds of funds. Both are actively marketing their funds—and frustrated because they are getting nowhere.

Identifying the most relevant investors for your fund is the single most important aspect of fundraising. Yet many managers don’t take the time to do so. Like the funds above, managers often buy a listand start dialing, without considering that government pension plans won’t evaluate a small hedge fund, funds of funds aren’t a source of stable and reliable capital, and numerous other nuances about the alternative marketplace. So they spend a lot of time, money, and energy contacting the wrong investors. There is nothing more instrumental to a successful marketing campaign than a good list. A good list is one that has the types of investors who are a fit for your fund. To know who your potential investors are, however, you have to know who you are—who you are now, and who you want to be in the future.

If you are a fairly new fund that is seeking allocations of $1-5 million and beginning to build up your business, funds of funds and family offices are good places to start. These investors are more apt to invest with emerging managers, and typically make smaller allocations. If you are an established $1 billion fund that has a long track record, larger institutional investors such as pensions and endowments are your best bet. These investors usually seek funds that are reputable and have an extensive infrastructure. Also, they make much larger allocations, typically $15 million to $50 million. Because they often do not want their investment to represent more than 5% or 10% of a fund’s portfolio, they seek managers with significant assets under management.

If you are a mid-sized fund looking to grow, the playing field is even larger. Most types of investors will consider a fund your size. That’s the good news. The bad news is that narrowing the field to find your best targets takes a bit of work.

Countless alternative investment managers waste time and resources trying to get in front of the major players. These include endowments such as Yale, Harvard, and the University of Chicago; pensions such as New York State, CalPERS, and CalSTERS; and notable private wealth management firms. However, because of their size and requirements, they are not realistic prospects for many funds. In addition, everyone is trying to get in front of these investors, and frankly, they have hundreds of funds already in their pipelines. The odds of getting an audience with these investors are not in your favor.

A better strategy is to determine the investor categories that are right for you. Then pursue the smaller or lesser-known investors in that category who are not in the spotlight, but who actively allocate. Research the boutique family office in Cleveland that dedicates $75 million of its $500 million portfolio to hedge funds, or the $150 million fund of funds in Minneapolis that annually adds two or three funds to its portfolio. They are not receiving as many calls and may be excellent prospects.

Sourcing potential investors
So how do you find the investors that are right for you? If you consider the thousands of databases that claim to have the most relevant and timely data on active investors around the globe, there are countless ways to source potential investors. However, your own contact list that you’ve developed through networking events, conferences, and lists traded with peers is usually a better source. The best list, of course, is one that is handcrafted.

It is often worthwhile to build a list of firms that are not on everyone’s radar screens. Usually, there is a reason why these investors are not well known. Sometimes it’s because they want it that way. Other times, the firms are relatively new. If firms are purposely private or so new that they don’t have a website or listed address, how can you find them?

The most impressive sources for identifying new targets, or targets that are less well known, are social and professional networking sites such as LinkedIn. These sites are almost unmatched by any other source, mainly because the investor profiles are actively updated and managed by the investors themselves.

The financial crisis drastically changed the investment community. Firms have closed, teams have been spun off, and people have moved from company to company. It is nearly impossible to keep up with the shifts in the alternative investment space. The beauty of social and professional networking sites is that as investors change firms or join new teams, they update their profiles. Obviously this process is completely arbitrary, and its timeliness depends on how diligently individuals update their status. Nonetheless, they are still some of the finest sources available.

Let’s take LinkedIn as an example. There are many ways you can search for prospective targets on LinkedIn. I generally start broadly and gradually narrow my search. I begin by typing in keywords such as “family office,” “hedge fund analyst,” or even “manager selection.” That instructs LinkedIn to search through all the profiles in its database and look for those keywords. Sometimes I add an industry search, which allows me to pick specific industries such as “investment management,” “financial services,” or “investment banking.” You’ll find LinkedIn does half the work for you, in that it orders the list of people by how relevant their background is to your specifications. Some low-hanging fruit is typically within the first few pages, with more challenging targets following.

Sometimes you are lucky enough to find all the information you need in an individual’s LinkedIn profile: the firm’s name, website, phone number—even some background on the firm, and how actively it invests in the alternative space. Other times, all you learn is that the individual is an investment analyst for XYZ Family Office in New York. Don’t get discouraged, get creative.

Be persistent
I exhaust every outlet before walking away from a potential target. For example, recently I found the perfect target on LinkedIn. He was the CIO of a Philadelphia-based single-family office with $700 million under management. In his profile he went so far as to disclose the name of the firm and that he was in charge of fund manager due diligence for the investment portfolio. The problem? No website, no phone number, and no other employees listed.

So I typed the name of the firm into Google. Nothing. Now what? Well, I had his name, so I did a Google search on him. All that came up was his LinkedIn profile. I spent the next hour trying to find his phone number and got nowhere. Then it came to me: I know the name of the firm and I know it’s based in the Philadelphia area; let me try 411. I went to, typed in the name of the firm and the region and Presto! I got an address and a phone number.

Persistence is the key to building a target list. I rarely give up, and if I do, it’s only temporary. If I feel like I’ve exhausted all possible avenues, I’ll give it a rest and look for another target. But I never abandon my search for long. A few weeks later, I’m back on the case—and this time I’m usually successful. All it takes is a little creativity and determination and you can compile an excellent list of potential investors. This is the most critical step in effective and efficient fundraising. It is worth the time and effort.

Drilling down
After you have aggregated a large list of potential targets through a handful of sources, the next step is to find more information. It is important to understand who each target is in order to prioritize your efforts. It’s also important to understand the MO of each investor before picking up the phone. Knowing the backstory of each target will help streamline the conversation.

So first things first: what type of investor is the target? Is it a family office, registered investment advisor, consultant, pension fund, foundation, endowment, fund of funds, or some other category? Knowing who they are will help you to plan your attack. Next, determine if the firm is well known or a diamond in the rough. If you’re trying to get in front of a multi-billion-dollar multi-family office with hundreds of clients, there are probably a dozen or so people who would be good targets. However, if you have identified a small, private investment firm that has four or five employees, there is only one associate, maybe two, in charge of fund selection. Now, do your targets invest in hedge funds? If it’s a family office, especially a fairly large one, odds are it allocates a significant portion of its portfolio to hedge funds. If it’s a $500 million pension with only 2% of its total assets dedicated to hedge fund investments, odds are it only invests in one or two hedge funds at a time.

Allocation cycles
After you have determined the type of investor, the appropriate contact, and if he or she invests in hedge funds, find out the allocation cycle. Each institution has its own allocation cycles. For instance, funds of funds are always evaluating and monitoring hedge funds for potential consideration, regardless of whether or not they are actively allocating. Pension funds and endowments, on the other hand, generally set an allocation timeline every year, which they follow until the mandate is satisfied. Family offices typically maintain a significant cash reserve and can allocate under short notice. What is the allocation cycle for your prospect?

Finally, understanding the role of the person you have identified at the target is also very important. The people you want to talk with have titles such as senior investment analyst, director of alternative investments, portfolio manager, analyst of absolute return strategies, CAIA, or CFA. These folks, especially when associated with institutional or accredited investors, typically are a good place to start. It is paramount when trying to execute an effective marketing campaign that you dedicate your time and resources trying to connect with the right individual. There is nothing worse than spending four months trying to reach someone only to find out that he or she is not the person you need to talk to.

Get personal
Now that you have identified the firms you are going to target, as well as the individuals, it is time to learn more about each person before dialing the number. Understanding each person’s background and path to the present position is important. In the alternative investment community, everyone knows everyone, or at least knows somebody who knows someone. Doing a little bit of research on your target could dramatically increase your chances of reaching him or her. For example, one of your current investors may have gone to school with one of your targets or your managing director may have worked with him or her at another firm. Connections such as these can get you in the door and give you an edge. So it’s worth the time and effort to conduct some due diligence on each and every target you have in your sights.

It is also important to determine the length of time a target has worked at the current firm. LinkedIn tracks the amount of time each individual has worked in the most recent position. If I have two contacts at a target firm, sometimes I go after the person who has been there less time, especially if he or she has been there a year or less. These individuals tend to be more willing to take a call and more open to receiving information, chiefly because they are new to the firm and want to show their value. Of course, if a more senior associate is a better target in terms of position and job duties, I will pursue that person. Sometimes more senior folks are able to say more definitively if they’re interested or not.

Understanding the pedigree of a firm can also play a key role in identifying good prospects. For example, if the patriarch of a family office made his fortune in oil and gas, chances are the firm probably invests in funds that are linked to natural resources. Doing the extra leg work and researching the target will set you up for a more relevant and comprehensive conversation.

Making the calls
Now it’s time to prioritize your targets and start reaching out. You can organize your list by your knowledge of investors or past relationships. You can also do it by investor category, size, or location. In most cases, the latter makes the most sense. Depending upon the extent of the investor’s due diligence, the greater the distance, the more expensive it will be to secure an allocation. Some investors think the same way. If you are a $150 million hedge fund based in Greenwich, Connecticut, for example, the odds of making some serious headway with a registered investment advisor in Saudi Arabia are slim to none. A better place to start would be with the $550 million multi-family office based in Chicago; it’s close enough to Connecticut and easy to get to.

The next course of action is to build a solid, cohesive, and direct approach for your pitch—one for contacting investors by phone and one for e-mail. Anticipate that you have 30 seconds to convey your message, pique their interest, and keep them listening. These folks are busy, and they don’t have time for a pitch full of stutters and pauses. Keep it simple, keep it tight, and keep it concise.

When you have your pitch down, decide if you should call or e-mail. I prefer making a phone call over sending an e-mail. You can convey an enthusiasm and a personal touch when speaking with someone by phone that is hard to do in an e-mail.

When you contact potential investors, it’s important to be diligent, but not annoying. I call it being professionally persistent. I have found that even when prospects are a perfect fit and are truly interested, more often than not they have so many balls in the air that they don’t have the chance to follow up regularly. Therefore, you must take control of the situation and be persistent in order to stay on their radar screen. Remember: the early bird gets the worm; the squeaky wheel gets the oil.

There are many intricate aspects to orchestrating a successful marketing campaign, and fundraising, when done incorrectly, can seem a most gruelling task. But if you take the time beforehand to identify and understand the most relevant investors for your fund, you will greatly increase your chances of raising capital.

The allocation
Raising capital in the alternative investment industry is something of an art form. Yes, it takes professional collateral, a proactive marketing effort, and consistent follow-up. But because it is ultimately about building relationships, it also takes intuition or a sixth sense for when to push and when to be patient. Perhaps nowhere in the process is this more evident than in the allocation phase.

You’ve been courting an investor for months, maybe even for more than a year. You suspect, or are told, that the odds are stacking up in your favour. You’re anxious to see this come to fruition. Perhaps you’re coming to the end of your fundraising cycle. It’s at this point that many marketers have the inclination to push the process along, get the deal done, and get the subscription document signed. Usually, however, that’s the worst thing you can do. Rather, you need to give the investor the time and space he or she needs to step through their process. Rarely is an investor acting alone today. So the best thing you can do is get an understanding of who’s involved, the steps they take, their timeline, and then get out of the way.

I have been through the allocation cycle many times, and each one has its own story, but they are all the same in one respect: ultimately, in their own time and way, investors come to a decision. After you have put your best foot forward, you have to let the investor’s internal decision-making mechanics take over. There is no need to panic or waste extra effort. In fact, it’s time to move your sights and energy to another investor, for the more investors you have doing due diligence on your fund, the better.

Before you move on, however, take time to think about how you got to this stage with this investor. What did the investor like or dislike about your fund? What questions did he or she ask? Investors tend to think along similar lines, so it pays to incorporate what you learned from one due diligence process into the next one. That said, don’t obsess about what may have gone wrong. It will drive you nuts. There are many aspects of this process that are not under your control. So, incorporate what you’ve learned into your approach, and take comfort in the fact that you made it to the final round. Then stick the shovel in the ground and keep working.

Funds are bought, not sold
It is rare for investors to choose a fund in a vacuum. Rather, they conduct a search, winnow their options down to a short list, and then begin the due diligence process. Investors generally don’t spend the time and resources required for due diligence unless they are seriously considering investing in a fund. Investors today approach the due diligence process with more gravitas than they did in the past. The financial crisis, the credit crunch, and numerous scandals have made investors wary—particularly those at smaller firms.

Before the downturn, the due diligence process at many family offices and wealth advisory firms was unstructured, informal, and as a result, pretty quick. To give you an example, some years ago I met with the principal of a large family office in Geneva. He was an older gent in a tiny office who wore a rumpled seersucker suit. When I sat in the visitor’s chair, he was partially obscured by a stack of Financial Times newspapers. He seemed on the quiet side, but he asked good questions. It was clear he knew what he wanted to know about my firm and its fund.

After about 25 minutes, he announced he had no more questions and stood up. I took that to mean the meeting was over, so we shook hands and I left. Outside I double-checked my notes. Had I confused this firm with another one? No, I wasn’t mistaken; it was a billion-dollar office. I went on to my other appointments and then flew home. Three days after I returned, I received a fax. It was a subscription agreement for $20 million.

Due diligence expands
This sort of thing was not uncommon before the financial crisis. Those days are long gone, however. Family offices and other small investors are now adopting the due diligence practices of large investors, such as government pension funds and private banks. And large investors are re-evaluating their processes to ensure they are rigorous enough, often adding new procedures, such as background checks on fund manager personnel. This focus on research is the main reason the due diligence process takes longer than it used to. Combine this with the fact that investors want to monitor the fund’s performance, develop a relationship with the executive team, and get to know the portfolio manager, and it’s no wonder that what used to take as little as six months may now require as many as eighteen—or longer.

So what does the due diligence process entail? Generally, it begins with the due diligence questionnaire, or DDQ. This is a document, prepared by the fund, that lists the questions most investors have and the fund’s responses. The list of questions and the level of detail provided in the answers varies from fund to fund; however, they generally cover the basics. That is, the DDQ should answer the most commonly asked questions about the fund’s infrastructure, which includes compliance, administration, and reporting. It should detail which state and federal regulatory agencies a fund is registered with, such as the SEC or FINRA. And it should provide an overview of the principals and any potential conflicts of interest, such as an ownership interest in a broker-dealer or another fund.

Many managers and marketers fret over the length of the DDQ. I’ve seen DDQs as short as two pages and as long as 50. Here’s a tip: it should be only as long as necessary to cover 90% of investors’ questions in a clear and concise fashion. Too short or cryptic, and investors may not perceive you to be forthcoming anddelete you from the list of contenders. Too long and wordy, and you may suffer the same fate, albeit for a different reason: investors are looking for managers who can crisply explain the details of their funds.

The visit
The DDQ has become a staple of fund marketing materials. It is usually the fund’s attorney who guides the preparation of the DDQ, although the principals often determine the depth and breadth. There’s no doubt that this is a laborious process, but it is a must. It is always important to put your best foot forward. Think of this as another opportunity to do just that. After reviewing the DDQ, if they have not already done so, most investors request an on-site visit as part of their due diligence process. The point is to meet all the folks involved, the investment team as well as the operations folks. Some investors will make a single visit. For others, one visit is not enough. So be prepared should an investor request multiple meetings. In this case, they usually ask for a meeting that focuses on the investment process and includes the analysts and traders. Then they’ll make a separate visit to do an operations review. Here the emphasis will be on fund administration procedures, trade reconciliations, and accounting and audit reporting. Fund charters, prime brokerage agreements, and other documents and manuals may also be reviewed.

Funds lost the trust of their investors during the 2008 debacle. It will not be restored overnight. The best thing you can do during on-site visits is be as open and accommodating as possible with potential investors. These meetings are the first steps toward rebuilding trust. No matter how thorough the DDQ or on-site visit is, you should anticipate follow-up questions. In fact, it is highly likely that you will receive a request for some bit of information that you do not have at your fingertips. Your best bet is to find it, and find it fast. Sometimes such requests are part tests. Investors often want to see how organised you are and how quickly you can react. It may seem silly, but if you want to stay in the race, get on it.

After all your information is in a prospect’s hands, there is not much else to do, which is why we at Brighton House say that funds are bought, not sold. The fact is that, ultimately, investors are trying to position your fund and others within their portfolios. They have constructed their portfolios based on some macro outlook and set of assumptions, and they have certain expectations of how their portfolios should perform in various market conditions. So after all the questions are asked and answered, investors sit down and evaluate how your fund fits into the specific scenarios they have in mind.

Investor aims are complex
Some marketers have the misperception that investors “shop” for funds, but nothing could be further from the truth. First, it’s impossible. Hedge fund strategies are complex, nuanced, and dependent upon the portfolio manager. Trying to compare them is like trying to compare apples to oranges. Second, it doesn’t suit investors’ goals, which are also often complex and nuanced. So all you can do is provide funds with the information they request, including the market conditions under which your fund will see absolute returns, and let them evaluate your fund in terms of their own strategies and models.

Another reason funds are bought and not sold is that investors often are trying to juggle the flow of funds. A redemption from another investment may be nearing or, in the case of a fund of funds, the manager may be expecting investor capital. The timing and the allocation amount rests squarely with investors; there is nothing you can do to influence these decisions. So it is important that you present your fund and its performance record clearly, explain what investors can expect in various markets, and let the investors decide if you are a fit. If they determine that your fund and others will help them achieve the results they seek, you and theywill receive an allocation. If not, well, maybe next time.

Whatever happens, though, stick to your strategy and focus on performing as expected. It is one of the factors that investors give considerable weight to when evaluating managers. I’ve known investors to stick with funds for this reason, even when they underperformed. In fact, this happened to me some years ago. After year end, my firm scheduled a review with a client, a well-respected consultant. We were apprehensive about the meeting. We had made money, but frankly, it had not been a great year. We had a merger arbitrage strategy and we executed it, but it meant that we missed some big opportunities and that hindered our performance.

As the meeting got under way, the client immediately focused on our “underperformance.” We talked about how we stayed with our strategy and noted that if they considered the performances of each underlying sector, the overall performance was actually quite good. It was a tough pitch. Although there were some very bright analysts in the room, they were all riveted on the bottom line. Finally, one of the team leaders came in, looked at our numbers and said, “Great job. You could have easily chased performance.” He realised that despite the bottom line, we did well given what we set out to do.

Be an able communicator
Another factor that can affect investors’ decisions is how you react when your fund underperforms. If you can demonstrate that you consistently communicate with investors in good times and in bad, some investors will stick with you rather than redeem their investment.

Waiting to hear from investors can drive even the most patient marketer close to the edge. Knowing the investment cycle of investors can save you much anxiety. For example, family offices generally have access to capital and funds of funds often have inflows daily. As a result, these firms are more opportunistic and make investments frequently— although they can leave just as quickly. Pensions and endowments, on the other hand, typically must have investments approved by a board of directors, which may meet only twice a year. They are not as nimble but make larger, longer-term allocations.

So get a handle on prospects’ investment cycles. If you understand whether the wait is six weeks or six months, you’ll sleep a lot better at night. You’ll also be able to focus on pursuing other potential investors and keeping your pipeline full, which is really the key to securing allocations.

Michael Calore is a research manager and Colin Widen is a vice president of business development at Brighton House Associates. These excerpts are from The Fund Manager’s Marketing Manifesto by Dennis Ford, CEO, BHA.