About Capital Formation

Dear Partner of Small (but ambitious) Investment Management Business,

First, let's define some terms.

Your business has:

• Products (your investment offerings).
• Customers (your investors).

Your investors, as you know, are individuals and family offices.

Other investment management firm’s customers may be more heavily weighted to institutions (endowments, foundations, sovereign wealth funds, public pension plans).

These LPs are your customers.

Can you imagine running a business at any scale that has a product without a sales team?! That doesn't obsess about their customers?!

That is why you need to implement a strategy around capital formation.

What is capital formation??

I am glad you asked.

It’s your strategy for keeping and bringing investors (customers) into your business and servicing them on an ongoing basis.

What are the components of capital formation??

Get your pen and pad ready because you need to take notes. You are being much more reactive than proactive at most of this. You need to think about how to execute at current scale and then build for future scale.

World-class capital formation is made up of four components:

• Investor Relations: This is table stakes. It's the servicing of existing investors from an administrative standpoint. It’s what is required of you to provide LPs per your agreement with them. While you can make? improvements, this is not the area you need to prioritize improvement around.?
• Fundraising: As you know well, this takes an incredible amount of time and consistent effort. You think you’re great at this. You have such wonderful and trusting relationships, right? That is cute. Reality is, you are more reactive and only spend/allocate resources as the need arises. You are not nurturing existing and future investors with value and intentionality the way that you would want to be treated. You are more transactional than you let yourself believe because you are not intentionally adding value when there is no ask needed.
• Product management: This is looking at the investments you are managing with the need of the customer (investor) in mind. Looking at everything you are doing with the lens of how your investors will think about it. Are you delivering what you promised to investors? The number one rule in this area of Product Management is “no surprises”. Never surprise your existing investors with a new strategy or any news about their investment that you don’t get in front of and communicate to them directly. You think you’re doing a pretty good job with this, but again, its reactive at best and your current process won’t scale.
• Relationship Management: Different customers/investors have different needs. Investors want a combination of returns, transparency, and insights. What you are providing to your customers/investors on an ongoing basis besides returns?? Long term investors want something above and beyond returns. This is fundamentally about nurturing and really good communication (personal calls, meetings) outside of Investor Relations standards. You actually love this and love people, naturally, you just don’t have it in a system in an organization that can scale. It’s way too organic and needs to be more of a defined process in your organization.

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Look, I don’t mean to be so hard on you but competition for capital in the coming years is never going to be more fierce. So, to be a sustainable/excellent investment management business you need to:

• Nail the product piece (which you do by being an excellent investor, focusing on what you can uniquely be great at, truly creating great products)
• Nail the customer piece (which you do through excellent capital formation and relationship management in particular)

That’s your path to a flywheel of sustainability/growth/scale/excellence as a company.

With your existing base of investors, you have such an opportunity and privilege.

As Meghan’s former teammate and TPG co-founder Jim Coulter said:

“We are at such an incredible privilege in doing what we do because we are one industry that has an opportunity to directly touch our customers every day if we wanted to. We can pick up the phone and call so and so at the state pension plan that's invested in us or the head of the Notre Dame endowment. You can pick up the phone, call them, and learn from them on a daily basis. How many products out there can you really do that? When you think about it, how many industries really allow you to do that?”

So, you get to pick up the phone and learn from our investors on a daily basis. If you did this more than you currently do, you would learn about competitive dynamics, what else they invested in, what they’re learning ... what a gold mine.?

You are not yet at the scale you can have a dedicated Capital Formation team. One day you will hopefully. But for now, guess what, that team is you, your partner, and your small (but excellent) team.

So, I leave you with a simple action plan you can execute in the next 60 days.

1. Schedule meetings with all your existing investors (in person is preferable).
2. In those meetings provide an update of their investment(s), answer any questions they have, ask them a set of questions (learning and "listening out" from them) and then let them know about your upcoming investment strategy. Listen out well. Take notes. Follow up with your learnings in a thoughtful note.
3. In your organization, define point people for each key customer relationships. Make it a process/measurable on the team to reach out at least once a month (via call or in person) with each contact.
4. In your weekly meetings, add an agenda item for "Product Management" and discuss each investment from the investors point of view. Put yourself in their shoes. See what actions occur as a result.?

That should put some bandaids on.

As you scale and build your organization, work towards having a dedicated senior partner of your team who is focused on Capital Formation and growing that portion of your team.

Remember, what Meghan said. “How you manage Relationships is everything.” You know this deep in your bones. You just lost sight of it. How you manage relationships is everything. Act and build accordingly.?