Why do fund managers work with us?
One of the key questions we get asked frequently, is why do alternative asset fund managers want to work with CoInvestor and give ‘outsiders’ access to their best deal flow. When trying to understand our proposition, it is a suitably sceptical question that investors and financial advisers ask, as the enquiring party is wondering “what’s the catch”. Their default position is to assume the fund manager has struggled to raise money, couldn’t get the deal done within their own co-investment circle or some other negative influence. Once explained, however, the picture becomes a much clearer and significantly more positive.
#Fintech, #AltFi again! Really?
The backdrop this needs to be considered against is that there are an undeniably growing number of private investors actively seeking to invest via online platforms. There is a constant media chorus around #fintech. You can’t pick up a City AM without some reference to Alternative Finance “AltFi” and its main constituents, peer-to-peer lending and or crowdfunding. How these markets will play out and continue to mature is a matter of opinion and that is a discussion for another time, but one thing they have done is driven huge consumer awareness of the possibility of investing in alternative investments online.
Investing online is completely normal
When you see investing in start-ups, property deals, or lending money to small businesses being advertised on the tube, you know that “AltFi” is racing towards the mainstream, with the FCA rightly trying to keep in the pace car. These large scale campaigns have layered wider retail investor awareness of the potential of alternative investments on top of more long-term and established investment behaviour that has been executed through online platforms such as AJ Bell and Hargreaves Lansdown for nearly decades now. The result is a retail investment environment in which investors not only have a huge propensity to transact on line, but now actively seek to do so, considering it to be normal.
Fund managers need a digital solution
In this current competitive environment forward thinking fund managers are rightly questioning how their businesses will operate within this rapidly changing sector, where investor migration online is accelerating. This therefore becomes a key motivation for fund managers to start working with CoInvestor, even though they may not need the extra investment. Instead they are aiming to secure a digital distribution channel to augment their current offline distribution models used to raise new funds. With this in mind, let’s look at some of the other key drivers for these relationships.
As an ex-fund manager, I can safely state that professional investors hate raising money. It’s an expensive, time consuming and frequently frustrating process that can be a substantial distraction from their day job. Further, I would also assert that the vast majority of fund managers aren’t very good at raising money – it is not a core competency. I was fortunate to work for nearly 4 years at a London-based investment management firm that had industry leading performance and thus could raise money pretty easily across both the institutional LP funds and the retail VCT funds but even for them it was often an irritating process. Understandably so; the deal-doers and the portfolio managers running the fund’s investments disliked the whole time consuming roadshow process. They wanted to be doing more deals or helping run their investee companies to conquer the world, not pitching their investment strategy, and being poked and prodded with due diligence questions.
Again, I say this as a previously active tech investor and it is perhaps an unfair generalisation, but fund managers, even if they invest in technology as part of the day job, will often not have much technological resource. Throughout my career in the City I was consistently staggered at how many firms still relied on excel and email to run the bulk of their businesses across front, middle and back office. This is across all sections of financial services be it investment banking, wealth management or fund management. Therefore, when you take my first point and combine it with a not just a lack of competence, but often straight up fear of technology, navigating digital distribution is neither something fund managers want to do or most often are even equipped to do. Hence, CoInvestor provides an outsourced digital distribution solution for these firms.
Vast numbers of alternative asset fund managers have operated co-investment alongside their core funds for many years. This provides flexibility when financing investments, allowing for speed, sharing risk and alignment of investors’ interests. This has historically been largely at the institutional level, but has naturally filtered down into the retail space. One of our key strategic partners, Oxford Capital, has its own Co-Investor Circle for example; a collection of investors who they have built a strong relationship with and will invite them to participate on a deal by deal basis.
Looking outside the retail market there are significant co-investment trends across most of the PE and VC markets at both an institutional and global level. This is further increased when one starts to add the investment behaviour of family offices. Preqin’s Investor Outlook Alternative Assets H1 2016 refers to the growth in appetite for co-investment from LPs listing the specific benefits of co-investing comprising, amongst others, better returns, lower fees, more control, and access to specific deals of interest.
Technology can support co-investment activity participants through providing significantly enhanced access and efficiency. A successful secondary or tertiary distribution channel that a fund manager can flex according to its business needs is highly valuable.
We would assert that the current distribution models for alternative asset fund managers are also under threat from the trends and pressures, both positive and negative, set out above. Let's carve out the large scale likes of Apax, CVC and KKR that aren't yet in our target market, but look at a typical small to mid-market and or retail player with £1bn or less of assets under management. When this cohort is seeking to access private investment, the typical model is often to write a long prospectus and hit the road trying to persuade financial advisers and wealth managers to allocate to your strategy. Managers can, and do, spend days, weeks or months trouping around the country, continually having to explain why their strategy is better than their competition’s, justifying their (sometimes extortionate) fees and generally wishing they were safely back in their offices looking after existing investors’ money. The end result being that if they are lucky, you get on the big wealth manager’s panel. If they are not so lucky they have to continue on the road until they reach the amount needed to make the fund viable. CoInvestor provides an additional digital distribution layer allowing a fund manager to increase their assets under management for no extra effort. We believe that in time, and through delivering scale and the confidence that comes with it, the flexibility of a digital distribution channel will relieve pressure to invest surplus cash in marginal deals and/or allow fund managers to do more opportunistic deals by being able to scale up AuM on a deal by deal basis.
Are the traditional fund structure’s days numbered?
While we assert that current distribution models in our target market are archaic, and note the concurrent investor trends towards AltFi and investing direct, we don’t think the traditional fund structure will disappear. Instead, we believe that the way fund managers build their assets under management will evolve, to become multi-channel and supported via technology. We note the progressive movements of Downing and Octopus, who have capitalized on wider AltFi trends by launching Downing Crowd and Octopus Choice to respectively distribute bonds and peer-to-peer debt products to private investors. We see these examples as early evidence of asset managers evolving and augmenting their existing distribution models to complement their current fund structures. These early movers are effectively future-proofing their business as the wave of offline financial services migrates on line.
If you can’t or don’t need to do it yourself - outsource it!
I refer again to my point numbered 2 above one last time and would highlight (being slightly less disparaging about a typical asset managers’ technological prowess this time), that there is often willingness towards digital adoption from fund managers. However, the road to technological enlightenment becomes a road paved with good intentions, due to good old fashioned human resource constraints. Not many of the small to mid-sized asset management firms have a really high quality strategic CTO, let alone someone to develop a digital distribution platform. As a result, CoInvestor is positioned to be a safe, robust and credible platform for asset managers to outsource their digital distribution strategy. A core value of the CoInvestor platform is that it was built by people from within the financial services industry, with a clear understanding of fund management business models. The fund manager portal has been specifically developed to accommodate and navigate the types of structures, developments and issues that can arise around an investment. With that in mind it provides the perfect outsourced partner for fund managers to start to respond to trends of online migration and direct investment by being able to unintrusively fold into their distribution model.
Sam Plumptre, Chief Executive OfficerSam was previously a fund manager at London based Private Equity firm Livingbridge as part of the the Baronsmead VCTs