- April 17, 2017
- Posted by: vincentkinjal
- Category: Direct Lending, Fund Administration, Fund of Funds, Hedge Funds, Real Estate, SMA, Tax Liens
Now that you’ve established a solid base of core investors, are you ready to “expand your horizons” and focus on targeting qualified investors?
Third-party marketers are consultants that essentially act as your external marketing team. These more seasoned groups will work closely with you to ensure you are ready to meet with potential investors and be positioned to be able to endure rigorous due diligence. Their roles can range from simply making cold calls to attending industry conferences and coordinating investor meetings.
There can be great benefits in getting the right third-party marketer, just as there is in using other high-quality outsourced services. For the cost of one or so full-time marketing staffer, you can gain the resources and depth of many marketing/business development disciplines, depending on your needs at the time.
The most important aspect of determining whether a marketer is the right fit for you is to see how much interest they have in getting to know you, your team and your culture. More important than just “selling” your numbers is for them to buy in to who you are, what you do, and why. Make sure that they take the approach with you and their other clients that you are just not “one of many” clients that they are selling. They need to demonstrate that they want to be a key part of your team and learn everything about you, as if they were employed directly by you. This goes both ways; make sure you get to know them and make sure their personality fits your culture and ideology. Spend time with them.
When people say that they will do cap intro for you, get at least three references from people they have raised money for. Your time is valuable, and meetings take up time. Consider this when entering into a relationship, never mind the disappointment factor.
There is no requirement for a fund manager to be licensed under a broker dealer to solicit prospects to invest in their funds. However, any person who is raising money for you and getting paid partly or in whole based on what they bring into your fund, must have both Series 7 and Series 63 licenses that are active under a broker-dealer (BD). Even internal people who are compensated by commission must have their license with a BD.
Many of the larger investment firms have created their own “captive broker-dealer” companies so their marketing people are covered and eligible for bonuses or commission-based compensation. There are also a number of BD houses set up for the specific purpose of having fund managers put their marketing people in these BDs with their licenses, these BDs provide all the BD infrastructure (such as a financial and operations principal, or FINOP) and do the regulatory filings (such as the FOCUS report) for a nominal fee. These work well to take advantage of economies of scale, with many licensed marketers under one roof.
The only exception to paying someone for bringing an investor to you without them being licensed and in a BD is when someone does that incidentally. For instance, your accountant, lawyer or even barber can be paid if they bring a client to you on a one-off basis. They could be playing golf with a friend and bring your fund up during a conversation, then they make the introduction to you and that person invests. There is no problem in paying your barber a one-time commission or a trailing commission of the typical 20% of management and performance fees you earn for the entire time that investor is in your fund. Just be careful, since once your barber gets a taste of getting paid for bringing investors to you, he will probably be motivated to continue referring people to your fund. Once you fall into this trap, that barber is no longer in the “incidental referral” category and is now engaging in the business (even if only part-time) and will need to be licensed.
Prime brokers promise cap intro and many have a short list of investors that they will put in front of you, but not much more. The competition among the prime brokers is tough. Reduced volumes and commission fees make every piece of business they get golden. Many prime and introducing prime or mini-prime brokers use this carrot to bring in business for the securities operations.
Don’t expect to ever get investors referred from your prime broker during the first year or two. They will want to see how the fund is doing and, more importantly, how much they are making on the trading side of the business. It’s a one hand washes the other situation.
Marketers are very selective and want larger funds. The larger the fund the more likely that they can attract bigger investors that will make bigger investments. Remember, they eat what they kill so they want to make the time spent bringing in an investor worth their while.