Wrappers & Regulation

I tried to get a more snappy title for this week's Fundicorn, but my brain + AI malfunctioned. But read on folks as we're going to share some ideas which might just be a game-changer for your next capital raise.

For those of you new here, Fundicorn is a weekly missive aimed squarely at helping emerging fund managers set themselves up for success in their fund raising. Please subscribe and keep an eye on my post content too for more capital raising tips, hints & hacks.

Let's start with a quick health warning, my team & I are not fund lawyers. What follows are 'on the ground', time tested reflections which should not be mistaken for legal advice.

I always think that the elephant in the room is that most emerging managers focus much more on their fund structuring and not enough on their regulatory footprint. Logical, yes. The fund creates the revenue which keeps the lights on whereas the permissions & licenses appear to be just burn items.

However.

1. Most allocators we talk to care just as much about the regulatory status of the firm as the type of fund & where it's located
2. They care about the survivability of the firm - has it got financial runway to get through the first 3 years whilst AUM is likely to be fairly meagre
3. They want to know that the firm has a solid key-man risk management policy in place

We're big fans of hosted solutions for new firms, sitting underneath a regulated umbrella (investment advisor to the regulated investment manager or appointed representative of a directly regulated firm) and taking a fund cell off the shelf within the structure the host has already built in locations such as Cayman.

To a large degree, this approach partly solves many of the early start up issues and indeed can reduce costs & time delays considerably.

But it's not the only way.

The hosted route can create a 1 track mindset which perversely can prevent the manager winning tickets.

Let me explain, you have your new fund & along with your host the motivation is clear, build AUM inside it. But then you start getting feedback from early adopter investors - could you manage an account for me in a segregated managed account at my bank? - could we co-invest together in your private market deals? - could you create a fund of 1 for me because I love some of your strategy but not all of it? - could you set up a share class for me at much lower fees & some GP carry because I won't pay 2&20 to a new manager?

Very few fund hotels will have actionable solutions for all these challenges. Of course not, it's not their business.

Given how hard it is to raise assets into a fund 1, 2 or even 3, the trick here is to be agnostic on the fund/portfolio wraps you offer investors. Create an open kitchen, offer as many flavours of structure as are needed for your target allocators, avoid over committing to 1 fund wrap or location.

'But this will cost me a fortune.'

It may well add complexity and some extra cost but without this mindset you will be walking away from over 50% of the tickets you're offered.

Consider doing deals with allocators that allow you to novate and migrate tickets from segregated structures into your co-mingled pool/fund in due course when everyone feels much more comfortable together. That way, you achieve the ultimate desired centrality of your revenues, enterprise value and portfolio management but without making it a condition on day 1 when the allocator is already grappling with so many hard choices to support you.

Consider a directly regulated set of shiny permissions in your chosen country and then add in your portfolio wraps with service providers who will open more doors at lower prices because of your gold standard license. There are many software packages on the market that enable aggregated portfolio management across many venues - buy the software, it will pay dividends sooner than you think.

Ultimately, we all like choice particularly when buying something new from someone new.

And to close, by adopting the 'open kitchen' mindset you may just find that you add a brand new edge to your marketing messaging. You will automatically present as open-minded, solution oriented & flexible.

Adapt or wither on the vine.

Thank you for reading. Subscribes, shares, likes & comments are always welcome.

If you need help implementing any of these ideas, book a free call with me here: Free Discovery Call

Tune in same place, same time next week for chapter 9.

Aucta Group

Heather Vincent

Emma Kershaw

William Davidson