Fundraising for Young Learners
In the last week, I’ve been approached by two different people asking my advice on raising money for hedge funds. Given that I did most of my marketing in the 90s and 00s, this is not unlike asking Hilary Duff how to make a hit record. It is true that I raised hundreds of millions back then for challenging products like Russian stocks and Baltic private equity, so my mental files, even if dusty, may have some value.
The 00s saw a hedge and fund-of-funds boom in which it seemed anyone could hang out a shingle and rake in money, but all that ended in 2008 with the GFC and Madoff. Since then, allocators have become extra careful and prefer to recommend well-known funds or spinouts therefrom.
Partly as a result, assets in alternative funds have transitioned to a power law, meaning that approximately 10% of the managers now run 90% of the money. My advice is aimed at the rest, and may also be useful for people marketing non-financial products. Fundraising is such a big topic that I’ll probably have more to say in later posts.
Rule #1
My first rule of marketing is: when you see a bathroom, use it. Definitely don’t get into an Uber in a city like London or New York without that pitstop, because what should be a short ride might turn into a painful nightmare. I’m joking a little but the bathroom rule, which I followed over 25 years of marketing travel, does lead us to a serious question: are physical meetings necessary anymore?
Meetings: Physical or Virtual?
In ancient pre-Zoom times, it was thought essential to meet prospective investors in person. I plied my share of the Geneva-Zurich-London route, which was the only way to see allocator punim and pry loose some of those Francs and Pounds. While I still believe a manager’s story is best conveyed face-to-face, this can now happen online.
I’ve been questioning the need to travel more since I went cross-country to present at a dinner of prime prospects, none of whom 18 months later has yet to invest a dollar. Meanwhile, of the three major investments we did get over that time, two met me only on Zoom and one over the phone. I hear the same from others in fundraising mode: more investors prefer to meet virtually, where they may be comfortably at home — they can be naked from the waist down for all I care, if that’s part of their process.
As a prospective investor myself, I realize that lately I’ve been likelier to go forward when I never met the manager in person than when I did. (This includes my Zoom with the producer of the Broadway musical Buena Vista Social Club – which I encourage you to see!) That said, I do occasionally accept invitations, even when my interest is limited, if it includes a meal somewhere I’ve been wanting to go.1
In that regard, entertaining is less important now than ever before. People have become way more serious about their money, and allocators like pension managers are under a microscope. Still, I know people who do old school marketing, with cocktail parties and conferences, but the substance must be high and nothing should happen that could wind up in The New York Post. And because investors have become so careful, they usually want to talk to the manager himself and not just a marketing person, no matter how gregarious or physically attractive the latter is.
The PowerPoint
The heart of any pitch is the PowerPoint, which can be sent ahead of time and used as an outline during the meeting. It should simply set forth the key facts about the manager and the product, with anything complex or non-essential relegated to an appendix or omitted. No one is going to read a 50-page deck, nor will any presenter get through it in a meeting. Also, people cram too many words onto a slide, making it unreadable, especially as an overhead.
The structure of your PowerPoint will depend on what you are selling. A manager with a stellar track record who’s offering another tranche of a successful product — e.g., Apollo Fund MDCXLIV — will usually emphasize the team and their track record. A newer manager should focus on the product and only secondarily their own qualifications. When Firebird started, we wouldn’t have raised much if we’d offered a general emerging markets fund, but when we isolated
the Russian voucher opportunity — being the first to offer a vehicle for it — we raised a lot (for the time).
If you’re not already a name in your field or backed by one, it will be easier to market a specific idea than an open-ended product. Say you want to do small manufacturing buyouts. Find a target, raise an SPV (special purpose vehicle), return a profit to investors on the deal, do another SPV, succeed again, and then you may be able to raise an open-ended fund.2 This way takes longer, but you will have built a solid foundation with clients.
Interlude: What To Do When the Prospect Falls Asleep
Years ago, in Zurich, my partner and I were meeting one-on-one with the head of a Private Bank and as I was in the middle of a sentence he dozed off, head lolling to one side. After a pause to decide what to do, I kept talking as if everything was normal. Folks, that mustachioed Swiss German came in with a large investment, so he either absorbed my pitch through his slumber or had a nice dream he attributed to me. Either way, never get rattled, just keep going.
Following Up
In deciding whether to follow up with a prospect after a first meeting, you don’t on the one hand want to seem desperate or be a pest. On the other hand, investors get so many proposals that they may just have forgotten and would welcome a reminder.
My practice is to separate prospects into the serious ones and the longshots, emphasizing the former. If you’re marketing a complex, contrarian product and are not KKR or Carlyle, it likely won’t pay to focus on institutions like pension funds. They may waste many hours of your time requesting information and never invest, or even steal your idea.
The aspiring money manager or entrepreneur should focus on high-net worth individuals who answer to no one, or family offices run by advisors smart and confident enough to make bold recommendations. Those are the people to pester, especially if you have a good update, e.g., a stock you highlighted to them has doubled.
If you send periodic letters to investors, you could add your best prospects to the distribution list temporarily. Or if you write general reports about your area of expertise, which is a good idea, you might email those to a much wider list of interested people, including your longshots.3
If you do launch your project, succeed, and somehow become flavor of the month, those same institutions who snubbed you may well be back asking to invest. That will be a sign that your asset class is topping out and you should be afraid. If a downturn does follow, it will be the investors who backed you early — I’m picturing an old guy who thinks most people in finance are idiots except maybe you — who will hang on and even add money.4 They are worth their weight in gold.
Do You Believe?
Finally, you must believe in whatever you’re raising money for, being so sure it’ll work out that you’d put all your savings into it — as you may have to do. I’ve made some bad recommendations over 30+ years in the business, but not for lack of belief in them.
Now, I’m aware that there are many successful brokers and bankers out there who will sell any crap that crosses their desk. I’ve bought some of that crap, I remember who sold it to me, and I have the receipts. The problem for these wannabe-Wolves of Wall Street is they always need new crops of buyers when the previous ones turn away in disgust. That is not, in my opinion, a good way to live.
Finally, you must also be patient, because it’ll probably take time for the genius of your contrarian idea to be obvious to everyone. Firebird caught lightning in a bottle in 1994, but our timing was lucky — and we subsequently had to endure five years of shocks before things really worked out. As I recently posted here, markets are challenging, maddening at times, but also downright inconvenient.
Important note: if you’re offering Knicks tickets, I’ll listen to any pitch at all, even a time-share.
I know of someone who successfully followed this exact sequence.
Widely distributed reports should omit product and performance information, for compliance reasons.
The highest-difficulty feat is to take a call from an investor who’s considering redeeming and by the end decides to add instead. It’s like the triple axel and I’ve landed it numerous times, almost always to the investor’s ultimate benefit.