Comment: Family offices and fund boutiques – off-market deals and face-to-face versus start-up and digitisation? (Markus Hill)

“The great events of the world are not made, they are found” (Georg Christoph Lichtenberg). Of course, the real experience of supply and demand in the field of investments in the fund industry deviates from this ideal. Even in the field of complex services, one rarely finds this ideal setting. An interesting phenomenon in the investment sector is that there seem to be different markets for offers, which are in the area of conflict between push and pull marketing. It can be concluded that a large part of the fund industry is in the more push-marketing mode. Many products do not convince the investor at first sight. Are there market segments or fields where this is perhaps less the case? Are there additional factors that invite suppliers and buyers to engage in dialogue? Is digitalisation or are transparency, platforms, etc. a solution to this problem?

Illiquid investments – off-market deals and trust

One example of many markets that seem to elude the common scheme of push marketing can be found in the real estate sector. When investing directly in real estate, so-called off-market deals are often concluded, usually under the official radar of the industry. In terms of the total market, this share seems to represent only a small part of the total market. The key point here is that precious, rare items are “coveted” by investors (family offices, foundations, insurance companies, etc.) and that they find one another on a deep basis of trust. What’s more, the motivation can even be that you want to work with certain parties and perhaps exclude other market partners from the outset. There is a basis of trust (“trust capital”) with investors who are, so to speak, the first in the chain to be offered the interesting properties, and subsequently, platforms or brokers can also become involved. One advantage is that one avoids a beauty contest that is difficult to control with the corresponding price increase potential. Interestingly enough, however, the price argument is not always decisive. In certain cases, an offer from your own, familiar network may well include a price premium. What could be an explanation for this? Filters are upstream, the partners know and trust each other, time is saved, the due diligence of the properties may already have been carried out by someone who is investing himself (club deals and co-investments). Precious, sought-after goods find their buyers quickly since the mutual trust that is established greatly reduces transaction costs, and price premiums due to increased quality of the offer are considered justified in many cases. A distinction must be made between these cases where, so to speak, valuable goods, in this case, real estate, should not be aggressively marketed. This can be an important factor, especially for family offices and their clients, as this type of product offer can harm the company’s reputation. This factor can also play a role for traditional institutional real estate providers and investors – discreet communication is required between parties who have often known and appreciated each other for a long time.

Liquid Investments – fund boutiques, fund industry, and push marketing

In contrast to the conditions in the real estate and off-market deals mentioned by way of example, the classic area of the fund industry is strongly characterised by push marketing. The market entry for a fund manager, for small amounts of seed money, in the liquid sector often appears to be quite easy. To be precise: The market entry, not the retention or growth of the funds. In contrast to the off-market example, the market here is heavily occupied, with far more hunters (providers) than the game (investors). In contrast to illiquid investments, the fund managers here still have to struggle hard with the “whip of transparency”. In the area of mutual funds, performance results are published continuously. There is competition for attention, each of the providers in this segment is under permanent pressure to justify themselves. While a natural “shame period” prevails in the venture capital and private equity sector (time of exit), the fund manager in the liquid sector is under increasing pressure to communicate with the investor or the public. For the managers who beat the index every year, this compulsion to communicate is not a challenge. These managers are almost impossible to find and the managers who do get to them are almost always confidentially recommended between investors, as these funds often reach the volume limit (soft close). Especially in the fund boutique sector, excellent managers can sometimes be found who have no sales pressure.

Digitisation, start-ups, and platforms

The facts described above can be summarised:

1. Some products and services do not require aggressive marketing.

2. there are overstaffed markets where there is pressure for intensive communication.

3 There are also overstaffed markets in the fund sector that offer “treasures”.

One can discuss whether the following dilemma could not be solved by the progressive digitization: In extreme cases, investors will not learn anything about products that they “really” need, because the interesting offers have already been marketed, in the sense of “communicated in confidence”. The investor learns “too much” from products that are often interchangeable or whose benefits can only be discovered through very long discussions with the product provider. To be fair, it should be noted here that the executing organs of this process (sales, marketing, etc.) cannot be seen as the origin and causer of this state of affairs; competition as a discovery process (Friedrich August von Hayek) is an expression of our economic system. It remains to be seen whether the progress in the field of digitalisation will provide perfect transparency in the area of “investments”. Of course, there are many approaches in the niche sector of start-ups (keywords: fintech, blockchain, AI, etc.), which are working intensively on models to solve this problem. However, the current platform solution does not seem to cover the market at all or only very inadequately. As long as “cyborgs” are not the only thing to be found on the investor side, it is still the case that people still enjoy communicating with other people. Besides, there is still prejudice in certain investor segments that properties that “land” on platforms often do not represent the optimal choice. At present, there still seems to be a problem in that the trust factor cannot yet be generated electronically, especially in markets that still seem manageable for the investor side. It is hoped that the perfect technical solution has already been found on the research side (even with existing companies). The weak point at present may simply be the human factor. His information behaviour, his information habits, and also the limited capacity to process all the available information. One can be curious to see what solutions technology will offer in this area in the future. Otherwise, in the relationship between the product provider and investor, the words of Friedrich Hebbel will continue to apply in a modified form, in addition to those of Mr. Lichtenberg: “Every person carries a magic spell on his face: someone likes it”.

*) Markus Hill is an independent asset management consultant, investor relations – national & international in Frankfurt am Main.


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