Manager Survey: The Source of Investment Capital


The Manager Survey

Phoenix American recently surveyed the sponsors of alternative investment funds on their fundraising strategies. Whether a fund manager raises funds from friends and family, institutions or through financial advisors, it will be the job of investor relations to see that their needs are met, their experience is a good one and that they have every incentive to reinvest in the future. But investor needs vary and what kind of investors a fund has will inform the approach of investor relations.

So, what kind of investors are the primary source of capital for alternative investment funds? This is the question our survey sought to answer.  – 675 managers of alternative investment funds participated in the survey.

The Question:

What is your primary source of investor capital?

The Results

Although managers are raising capital across all available sources, almost half are leveraging financial advisors to raise retail investor capital. The high-volume small-ticket approach has the potential to raise a lot of capital but puts a premium on investor relations. For every investor category, investor relations excellence is key to retaining existing investors, encouraging re-investments and gaining referrals. Let us consider the special investor relations needs of each category of investor.

Management Partners – this is probably the scenario with the smallest number of investors but with the most distinct need for investor relations excellence. A fund capitalized by its management partners has a demanding shareholder base. Managers want the highest level of monitoring, reporting and visualization into the life of the fund that they can get. Specialized investor relations with advanced systems and data analytics capabilities will be required.

Investor Reinvestments – there can be no better endorsement of an investor relations team than the reinvestment of current investors. The return on investment is the primary factor but the investor experience provided by the investor relations operation goes a long way in conveying the professionalism and efficiency of fund management.

Investor Referrals – the willingness of an investor to recommend an investment to a friend or colleague says a lot about the investor relations team that supported the investor experience. An investor is unlikely to recommend investing with a fund sponsor if interaction with investor relations has been frustrating, deliverables have been late or important information has been hard to come by.

Broker-Dealers/RIAs – raising capital through financial advisors means raising capital from strangers. It is critical to give retail investors a professional investor relations experience. There will be none of the understanding of friends and family or management partners if investor relations is not prioritized. Financial advisors will be aware if their clients’ investor relations experience is poor and avoid recommending that investment going forward.

Institutions – the most demanding investors of all, institutions have due diligence processes and reporting requirements that only specialized investor relations can handle. In many cases, institutions consider the lack of outsourced third-party investor relations to be an unacceptable operational risk and will not invest in a self-administered fund. The Institutional Limited Partner Association (ILPA) is a trade group that recommends the highest standards of service and financial reporting for its members, a standard few investor relations teams, in-house or third-party, can meet.

Where managers raise their investment capital defines a great deal of their back-office processes for the life of their funds. Whatever the source of capital, the systematic flow of funds and information to service the investor base along with investor relations attention suited to the investor type is as much a part of the life of the fund as sourcing, acquiring and managing assets.

The ultimate goal of investor relations is to keep the investment capital coming. A serious commitment and investment in investor relations excellence is a smart business decision for any fund.

What stands out in the results of this survey is the reliance of almost half of private fund sponsors on the investments of retail investors. The loyalty and referral business of strangers has to be won with solid returns and professional service. Investor relations excellence is an essential part of that equation.