Emerging Managers Seeking Anchor Investors
It’d be nice to be able to tell recently launched hedge funds that raising the first $100 million or $200 million will be easy. However, the current environment for raising funds is anything but. The due diligence ringer that investors put funds through is longer and more thorough than ever before. In addition, although BHA currently has over 600 active mandates for funds with less than $200 million in assets, only a very small percentage of those would consider funds with less than $20 million. The challenge facing emerging managers is enormous in the current fundraising atmosphere. Funds that are just starting the asset-raising process need to not only identify potential allocators but also decide whether to target anchor or seed investors.
A marketer at a fund with less $100 million recently commented to an analyst, “Compared with two to three years ago, it takes four times as much work today to get a ticket that is half the size.” In other words, the effort, time, and resources needed to grow a fund, especially as it attempts to eclipse the mythical $100 million barrier, is enormous.
Every emerging fund that is looking to raise capital and grow its asset base must first ascertain what types of accounts it wants to target. Investors interested in emerging funds can generally be grouped into one of two buckets. There are investors looking to provide seed capital to emerging funds and become GP’s. Then there are investors that prefer an LP commitment; they’re interested in making an anchor investment in the fund. If the marketer’s claim about the amount of time and resources necessary to raise the capital is true, then it would be wise for the fund to not only identify potential targets but also to identify the type [Do you mean size rather than type?]of investment the fund could potentially expect.
Most fund managers will prefer to target anchor investors that are not looking to make a seed commitment first. However, often times these investors look for preferential treatment with regards to management or performance fees, or liquidity through a separately managed account structure. Other funds will prefer to associate themselves with a well known institution that provides seed capital. This can be advantageous because it brings a level of calm and stability to the fund, and assurance of minimized business risk, after the larger institution comes on board.
Each type of investment has its pros and cons. However, for smaller funds looking to raise assets, they will undoubtedly have to turn to one or the other.