Creating Institutional Visibility

Starting fresh

For emerging managers not coming from big-name firms, grabbing investor attention can be difficult without the tailwind provided by a well-known company’s reputation. While the process is infinitely more challenging for those without the backing of a renowned institution, it offers an opportunity for managers to differentiate themselves and carve out their own niche in the market.

One obvious way to become institutionally relevant (without relying on pedigree alone) is to be better than the competition in building a business, not just a return stream. This is an often-overlooked point as active managers often judge themselves by their returns alone given their competitive nature.

Institutional investors expect strong returns as a given.  As they invest in products with the anticipation of favorable returns, they will look beyond mere performance metrics before they even consider a meeting. In a crowded field of 10,000 hedge funds, the real challenge lies in the broader endeavor of crafting a robust, attractive business rather than focusing primarily on returns.

The Art of Building a Business

The belief that a small team of skilled investors and a solid operations crew can naturally attract significant assets may hold up in terms of performance but doesn’t necessarily translate to building a sustainable business.

Creating a leading asset management firm mirrors the journey of building any successful enterprise: it’s crucial to gather a team of top-notch individuals to make the venture appealing and sustainable right from the start. While several formulas exist for running a successful business, one model that does not appear to work is what used to be referred to as “two guys and a Bloomberg” or, more recently, “two guys plus a COO and a Bloomberg.”

Success stories of small ventures scaling up are rare and the exception rather than the rule. Similarly, in asset management, investors are searching for robust, well-established firms, not side projects.

Easier Said Than Done?

Business development often falls outside the skill set of many aspiring asset managers. Their expertise typically lies in market analysis and portfolio management rather than in the nuances of business operation. The gap between evaluating a company’s potential and managing a successful company is both wide and deep, and not all managers acquire the necessary business acumen early in their careers.

While investing might seem straightforward with the appropriate framework, establishing the necessary infrastructure is anything but easy. Success tends to favor those who recognize and address this challenge from the outset, though they are a minority. The landscape of active management is dotted with tales of those who couldn’t bridge this gap, highlighting the importance of business savvy in this field.

Telling a Better Story

When managers successfully set up their institutional structure, the next challenge is effectively sharing their vision with investors. Being intelligent and having innovative strategies isn’t enough, as one must be able to effectively sell these ideas to succeed.  This is a reality that is not exclusive to the asset management industry.

Despite the common disclaimer that past performance may not predict future results, there’s been a historical tendency to lean heavily on historical achievements by both investors and managers. Many managers default to showcasing their experience and successes as a primary selling point, a straightforward approach that has seen enough success to perpetuate its use, despite its reliance often leading to failure due to its simplicity.

Like any business, asset managers must craft their narratives in a way that resonates with their audience. Those branching out from renowned firms might find it easier to draw investor interest; however, the commitment required in building a substantial business is fundamental regardless of past affiliations.

Whether emerging from under the wing of industry giants or carving out their own path, managers should focus on three key areas:

• Enterprise-wide risk management — developing strategies to mitigate investment risks and the business risks beyond investments.
• Effective communication — distilling the investment process into a set of concepts that investors can easily process and understand.
• Track record — breaking it down into component parts so that investors appreciate why a manager has made great returns in the past and why they will make great returns going forward.

Knowing Your Audience

With a fiduciary duty to their beneficiaries, allocators are focused on objectives like ensuring regular pension disbursements, supporting scholarship funds, or maintaining long-term financial security for families. Thus, the emphasis is less on seeking out investment gurus and more on finding managers who can align their strategies with these specific goals.

Asset managers who fail to understand the unique needs and objectives of their clients — be they pension funds, endowments, or wealthy families — are missing a fundamental aspect of their role. The industry’s shift towards a more client-centric approach highlights that success hinges not on star status, but on the ability to deliver meaningful, client-aligned results.

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Kevin Becker is a Co-Founder and CEO of Kiski. Connect with him on LinkedIn here.