Toll Free:
877.456.EFSI (3374)
At EFSI, we are fortunate that we have a good presence in the emerging manager cohort of the industry. We get referrals from other service providers when a new manager is looking to launch, and this group has been a staple of our customer base since we launched in 2017.
2023 hasn’t been the easiest year for them. We’ve seen a notable pull back in new launches activity generally, although there have been a couple of bright spots, in residential real estate and long short equity hedge funds, specifically.
The slowdown can be attributed to a few reasons, including the general fundraising trend in the alternative investment industry of investors switching from alts to liquid debt, for example. And there are the second-degree impacts of this, such as investors sticking with larger, more established fund managers (no-one ever got fired for hiring IBM, as the saying goes) over newer, perhaps unknown, managers.
But next year should hopefully be better for the new managers with the next great trading strategy or eye for a deal. There seems to be more macroeconomic certainty at the moment – or, to put it differently, less macroeconomic uncertainty – given that interest rates seem to have plateaued (for now) and inflation has reverted to more ‘normal’ levels. The environment this year has forced many potential new launches to put themselves on hold, preferring to wait for calmer waters before they set sail.
When we take on a new emerging manager client, we often get asked for more general advice, as well as the more specific fund administration services that we offer. So, if you’re a potential emerging manager, and you’re looking to launch in 2024, there are four things that we hope will help.
First – make sure that you have a business plan that future proofs your business. That means having some idea of when to insource some of the things you outsource in your early years; it means knowing at what point you add certain new hires (i.e. when you get to a certain AUM, or when you want to launch additional vehicles) and what those hires will be responsible for.
Second – you’ll have read a lot about being ‘institutional-ready’. Your potential allocators/LPs are increasingly looking at your service provider selection not only from a risk management and compliance perspective, but from a growth perspective. Remember that your investors don’t want to redeem from you; they want it to work out in the long term. If you’re a hedge fund, that means not redeeming. If you’re managing a closed-ended fund, that means re-upping for your next fund, and the ones after that. So, make sure that you don’t cut any corners on service provider selection.
Third – the regulatory environment is getting ever more onerous. You will be spending more time on compliance-related tasks, like audits. It’s important to factor that into your cost and time management predictions.
But perhaps the most important – your cash runway. Emerging managers need to raise money, and they want (and need) to do it quickly. But often, the expectation of when the capital will come in is, all too frequently, much sooner than when the check (rather, the wire transfer) is sent. In some ways, running an investment fund business is no different than any other start-up – they bleed cash in the early days until money starts coming in and then the cash flow situation stabilizes.
If you’re looking to launch a first-time fund in 2024, then hopefully you’ll find the environment to be friendlier than it was this year from an asset raising perspective, and hopefully, what I’ve written here has provided some helpful insight.
Good luck.
**********
Anthony D. Mascia is Managing Partner at EFSI. Connect with him on LinkedIn here.
EFSI is an independently owned, SOC-1 compliant, full-service fund administration firm. We provide accounting, reporting, administrative, and capital introduction services to a wide range of alternative investment funds including hedge funds, funds of funds, private equity funds, real estate funds, venture capital funds, and family offices. The center of EFSI’s service incorporates resilient technology and accomplished staff, providing clients a tailor-made service with exhaustive transparency. Give us a call today or reach out to our support team online. We look forward to hearing from you soon.