Loud and Clear – November 2019

What’s that coming over the hill?: How to prepare for the New Era of Asset Management

 

In a previous piece, I looked at some of the changes that you will probably have observed, yourself, as we move into what we call the New Era of Asset Management (take our New Era of Asset Management survey here). In that article, I touched on three of the areas that we, at MJ Hudson, expect to have significant impact on asset managers and their investors:

  1. the blurring of lines between LPs and GPs;
  2. the greater access of affluent and even retail investors to alternatives; and
  3. the enabling power of technology.

Of course, there are more facets of the New Era of Asset Management that will be transformational, but we shall leave them for anther time. Perhaps, now, it is pertinent to ask, having acknowledged the changes afoot: What on earth can we do to prepare?

Fear not – that is exactly what we will be looking at in this series of newsletters. In each, we will provide some advice on one of four key areas:

  1. Positioning: how you are perceived and how you face the market.
  2. Advisers: who you bring into your inner circle and what you are willing to learn.
  3. Structures: opportunities to improve your flexibility.
  4. Staff: key hires to help you master new disciplines.

This time, we’ll look at positioning: how you are perceived and how you face the market.

Faced with the pincer attack of downward pressure on fees and higher operating costs, the smart tactician has three choices:

  1. raise more assets, to create the economies of scale that will go some way to protecting the bottom line;
  2. achieve scale a different way, by acquiring rival firms; or
  3. work harder to support premium fees by articulating your value proposition in a clearer and more compelling fashion.

Doing nothing will mean that you are at increasing risk of losing investors and becoming unprofitable. Further consequences are that your top performing staff will be vulnerable to approaches from other firms (or the notion of setting up shop, against you) and your entire business could be swallowed by a competitor – Jonah, meet whale…

GATHER YE ASSETS, WHILE YE MAY

If you choose to scale your business, there are, broadly speaking, two routes. These are, firstly, raising significantly more assets into your own firm and, secondly, acquiring or merging with a rival (to be covered in our next piece). Both take time and neither is easy.

Raising more assets will certainly mean collecting more commitments for existing strategies, but that will rarely be enough. Whilst managers perennially tell us that they expect their next fund to be twice the size of their current vehicle, they rarely achieve that goal and (depending on where you are starting from) doubling the size of one fund won’t always be enough, anyway. Managers with real ambition will recognise the need to launch new products, including in new strategies. Whilst “larger funds” and “more funds” pose two very different sets of problems from an operational perspective, they share a common requirement.

What can convince an institution to double up the amount of capital it invests with you and what could persuade those sitting on the fence to take the plunge and commit for the first time? In a word, it’s “BRAND”.

If you think about it, successful brands are a series of promises. Whereas Coca-Cola trades on “you will like how this tastes” and “drinking this will make you happy”, yours (unless I have very much misunderstood your business) might include variations on “investing with us will deliver strong returns” or “we won’t lose your money”. Well, some of them might be variations on these examples (it’s important to show that you are relevant to your potential investors) but most ought to be the sort of things that other firms can’t say: they should differentiate you from the pack.

You need to take time to sit and think hard about what really sets you apart (hint: it’s not “proprietary deal origination”). To start, you need to know how you are viewed in the market. The best people to ask are those that know you best – your team, your investors, your lenders, your portfolio companies, your advisers. And the best way to do that is by working with a third-party to conduct a thorough perception study. Full disclosure: this is a service that my team at MJ Hudson provides.

Once you know how you are perceived, you need to go one stage further (or, rather, one stage further back) and take some time to figure out what matters most to you. Take a day (or as much of a day as you can) and gather your senior team members. Get someone in to take you through some exercises to pull at some threads and unravel what it is that you are made of and what your core values are. Then get them to take away everything from the sessions and make sense of it for you, drawing on the perception study work you have done, too. The deliverable should be a set of key messages that articulate your proposition and what makes you relevant and exceptional. It should also include the brandstory for the firm – a narrative, setting out why you exist and what you stand for. Again, my team can run this process for you, but whether you do it with us (excellent choice) or with someone else (why would you do that?) you simply MUST do it. It’s too important to ignore.

You can run follow-on work to identify potential opportunities for new product launches, of course.

With a strong brand and a clear value proposition, you will find it much easier to explain who you are and why an investor should commit to you. Of course, in the eyes of an investor, your attractiveness is driven by two factors: firstly, your track record, in the past and, secondly, your brand – the promises you make about the future and how likely they are, in the investor’s eyes, to be fulfilled.

The chances are, there is nothing you can do, right now, about your track record – but you sure can improve your brand (so do it!).

Next time we will look at the other way to raise assets quickly: mergers and acquisitions, and then we will dive into the strategies that you can employ to support a premium fee structure – making sure you are in the right fork, as the market continues to bifurcate.


For more information on how MJ Hudson can help you navigate the New Era of Asset Management, please contact Matthew Craig-Greene using the contact details below.