Strategy: Finding Your Niche
Defining your strategy will be the most important decision you make in your new firm journey.
Your vision should be ambitious, enduring and aligned with your values. Performance is the focus of any investment firm. To drive performance, your vision should underlie all your actions, from recruitment, through investments, to risk management. Although the vision might be clear in your mind, you’d be surprised how often it is poorly communicated internally and externally.
Consider:
- Design the platform around you to best harness your passion and skills
- Define the culture you want to build, and to one day leave behind
- Refine that vision into simple and clear statements of intent
- Ensure the entire organization understands your vision and know how they can contribute
Your investment program should be underpinned by a carefully considered strategy.
Consider:
- Target risk-return profile compared to peers, the market and LP expectations
- Target sectors compared to your prior experience
- Target geography compared to your firm’s footprint
- How much capital you need to make the economic model viable, and how much capital could be invested in this opportunity over time
An investment process needs to be replicable and comprehensive.
Consider:
- The investment process from origination through screening, diligence, structuring, execution, monitoring, and exit
- Identify the key committees, documents, and approvals
Team: Hiring and Retaining the Best
There’s more to a great organization than its
Founder. Building a team requires leadership
and empathy.
Leadership
- Develop and communicate a vision to your team
- Embody the work required to achieve that vision
- Shape a culture through values and integrity
- Build people through mentorship, consistency and fairness
Developing talent
- Delegate authority with trust
- Assign proper resources to achieve objectives
- Balance compliments with clear counsel
- Set standards and regular objectives
- Keep morale high and care for the team
- Support continued learning and education
- Cultivate acts of charity
Diversity for performance
- Diversity is the aggregation of various cultures, backgrounds, talents, skills and abilities which we believe deliver superior team performance
- Diverse thinking can be consciously targeted but can also be trained when building a team
- Build organizations that avoid group-think
- Create a culture of accountability
Operations: Building a Firm Foundation
“You do not rise to the level of your goals. You fall
to the level of your systems.” - James Clear
In our experience, most firms manage firm and fund finances in three ways:
- In-house resource: CFO or COO/CFO with controllers and accountants to support
- Combination of in-house resources and external support from outsourced CFO firms
- Fully outsourced solutions from boutiques or multi-service fund administrators
In all cases, we recommend that fund auditors be appointed early to support.
While initial budgets and firm operations can be managed by Founders in the early days of a firm’s life, financial support functions can quickly become time-consuming and complex once investors commit, and solving problems takes longer than developing effective solutions before they’re needed.
New firms should ensure that they have an operations team and sufficient processes in place to manage investment execution, implement effective controls, and appropriately segregate duties and counterparties.
Fund administration offerings have become more robust over the last several years, with improved technology solutions that cut across all parts of the trade lifecycle – trade bookings, settlement, and accounting.
Fund administration services also offer full investor services, from processing capital activity to supporting all investor AML/KYC and other multijurisdictional regulatory filing requirements such as FATCA and CRS.
Fund counsel should be chosen with a view to their expertise within your strategy, geography, and size rather than prior relationship.
In addition to drafting firm and fund documentation, counsel will support regulatory functions and provide tax and structuring advice as required. Importantly, cost expectations should be agreed with fund counsel in advance of firm and fund formation work.
Compliance is a critical component of a new firm. Founders and their respective operational leads should leverage a compliance consultant to supplement their compliance monitoring efforts and support best practice awareness. In certain jurisdictions, utilizing a regulatory host umbrella can reduce risk and increase speed to market.
From origination, monitoring and reporting to investor management and marketing, technology has the ability to support all firm operations.
With the rise of machine learning and AI, there is even more potential today for firm process optimization.
Consider:
- Customization of a CRM system for both the investment side and the distribution side of the firm. Each side will have slightly different goals depending on whether the strategy inhabits public or private market, for example:
- Investment origination and decline tracking
- Investment process and team time management
- Investor relations and fundraise management
- Fund administration platform to streamline firm finance and reporting
- AI-supported software to automate internal processes e.g. diligence aggregation
Capital: Aligned Partnerships for Growth
Alignment can be the difference between the long-
term success or failure of capital partnerships
In our opinion, the best emerging managers have mastered:
Momentum
Fundraising is all about driving forward and keeping momentum.
The biggest accelerators of momentum are:
- Large investor commitments
- New investments
- Portfolio events or material performance upticks
The biggest momentum killers are:
- Missing marketing or legal documentation at launch
- Lack of institutional operations
- Empty team boxes in presentation
- Lack of initial traction with investors
- Poor or confused messaging
Storytelling
The best pitches are stories balancing an enduring problem with a credible solution, delivered by a leading and trustworthy team.
Take the investor on a journey by:
- Naming the enemy
- Creating urgency
- Highlighting the solution
- Showing the benefits
- Building trust
- Demonstrating the potential of the solution
A strong elevator pitch, which is presented in the first five minutes of every investor meeting, will keep messaging tight and introduce key topics from the start.
Approach
Trust
Your partnership with investors will likely span multiple decades. Building a foundation of trust should be at the forefront of everything you do.
Anchor investors
Accepting strategic capital can transform fundraising momentum, support operations, and raise your profile.
Capital introduction
Decide early in your process – will you raise capital with an internal team or use an external introducer? Unless you have deep investor networks, a high industry profile, or an internal IR team with significant reach, use external support.
Phased approach
The best fundraisers use a highly targeted approach and triangulate the best investors through prior investments, current appetite, and specific investment focus areas. Those who know you best are often the best for early meetings and calls – both for feedback and fundraising support.
Network effects
The strongest introductions are referrals. Those who know you, particularly investors, will be the most influential cheerleaders. Build and strengthen relationships well in advance of asking for capital.
Materials
Whether it’s a conflicts policy or an investor presentation, every document should support your firm’s brand and be an endorsement of your institutional quality.
While the fundraising data rooms of hedge funds and private markets may vary, the best managers will prepare a comprehensive and transparent suite of documents for investors. Solid documents ensure trust continues after meetings end.
Data room documentation
Public markets
- Presentation
- Due Diligence Questionnaire
- Company data sheet
- Policies
- Compliance manual (or table of contents) and code of ethics
- Allocation policy
- Valuation policy
- Co-investment & co-sponsorship policy
- Diversity and inclusion policy
- Expense policy
- ESG policy
- Risk management policies (including trade allocation, trade error, soft dollar)
- Privacy policy
- Cash Control Policy
- Limited Partnership Agreement
- Private Placement Memorandum
- Subscription documents
- Legal structure chart
- Form ADV brochure (if registered)
- Investment lifecycle
Private markets
- Presentation
- Due Diligence Questionnaire
- Company data sheet
- Policies
- Compliance manual (or table of contents) and code of ethics
- Allocation policy
- Valuation policy
- Co-investment & co-sponsorship policy
- Diversity and inclusion policy
- Expense policy
- ESG policy
- Risk management policies (including trade allocation, trade errors)
- Privacy policy
- Cash Control Policy
- Limited Partnership Agreement
- Private Placement Memorandum
- Subscription documents
- Legal structure chart
- Form ADV brochure (if registered)
- Investment lifecycle