Comment: Family offices, entrepreneurial funds, and fund boutiques – Seed money, sales, trust, and motivation

“Nothing can strengthen a person more than the trust that is placed in him” (Paul Claudel). This insight also continues to apply to the field of fund management. Especially in fund management, market entry barriers for new portfolio managers are a critical factor in seeding and subsequent distribution. Many feel as spoken here but only a few are chosen.

Are there constellations that enable certain fund managers (“fund advisors”) to launch their funds more quickly? Are there perhaps different motivations for certain types of fund launches? What are the growth prospects for certain concepts – push versus pull?
Different motivations can be distinguished more or less precisely when launching fund concepts. These basic ideas are of central importance for the process of searching for seed money at the beginning and also for the subsequent sales process.

1. motivation – launch with “conventional” fund boutiques, own product and performance

Owner-managed, independent asset managers have been very successful in recent years in launching and distributing investment funds for private and institutional clients. Asset managers often pass through various stages: Direct investment support, standardized asset management, fund asset management, and finally the launch of their fund. Mixed concepts can also be found, the transitions are often fluid. In most cases, the asset manager will refrain from stocking the client’s accounts exclusively with his products. Only the variety of investment goals and investment preferences of the customers ensures diversification. The central motives in this area are often standardization and the scalability of processes. In the end customer sector, this concept is generally accepted if the manager is within a certain performance corridor compared to competitor products.

Especially since in many cases, the asset managers are also invested in the fund with their own money in smaller parts. The relevant market here is the common concepts of market participants such as savings banks, Volksbanken, fund asset management companies, and commercial banks. A strength here may be that many of the fund buyers value the relationship with the advisor and have come to the conclusion that there is no such thing as the perfect portfolio manager who beats the market every year. Many of these “smaller” concepts often find it difficult to gain access to semi-institutional and institutional investors, as the selection process here largely ignores the classic relationship aspects (beauty contests, RFPs). It remains to be seen whether the results of this more objective process will always exceed the “average” results from an overall portfolio perspective. (This point also applies to the concepts discussed below in the area of family offices/entrepreneur funds).

2. motivation – a requirement for family offices

The battle for the sovereignty of interpretation in the area of family offices continues. There is a wide range of approaches here, from the “noble asset manager” and some multi-family office concepts (group-bound and independent) with a strong interest in promoting their services and products to the single-family office without proprietary products. As long as all economic interests are presented transparently in the client meeting and the external appearance, this variety of concepts has the charm of creating a constructive competitive environment.

Here, too, many of the fund initiators invest their own money in their concepts and make their performance verifiable through the “transparency whip” of the mutual fund industry. Even for products that are not directly advertised to the general public, the question of comparability with publicly advertised competitor concepts arises at the latest when fact sheets of fund data are published.

3. motivation – entrepreneurial funds and positioning in the universe of fund initiators

The transition from entrepreneurial fund concepts to the area of family offices or the area of independent, conventional asset management concepts is fluid. On the one hand, there are concepts where the fund initiator is not or hardly ever invested with his own money in his product. Here there is a need to step up the sales offensive to ensure the profitability of the fund concept. A conflict may arise here if the incentive structure in management remuneration leads, consciously or unconsciously, to the taking of greater risks. In fairness, it should also be noted at this point that, with transparency and appropriate information, the customer has the choice.

Entrepreneurial funds, seed money and the “concept of invitation

There are entrepreneurial fund concepts that may differ in certain aspects from the categories mentioned above or from the entrepreneurial fund concepts without “own contribution” of the fund initiator. This “deviation” becomes apparent when one looks at the process of seed money search and distribution policy. An example: The entrepreneur has sold his own company and managed his own money for years. To use his know-how in a concentrated way in his management of family money, he sets up his fund. In the beginning, this fund is mainly endowed with its own seed money. In further steps, the so-called “Family, Friends & Fools” often appear. This expression from the business angel sector is meant in a completely value-neutral way. Basically, in this case, the fund initiators monetize the trust that they enjoy in their closest environment. Gradually, external investors often join in.

Why can this fund concept often be of interest to certain investors even if they do not have their fund management history? Entrepreneur meets entrepreneurs in conversation. Entrepreneurs with funds have “skin in the game” and strongly signal that they believe in their skills and experience. Since he has made his money by taking entrepreneurial risks, there is motivation to generate performance for his portfolio. However, a central aspect here will be the area of risk management in combination with long-term thinking.

If one takes a closer look at the above-mentioned facts, one can conclude that there is a central difference to common, sales-oriented concepts: In the initial phase of a fund’s history, it is possible to proceed prudently – the power lies in the calm. Also on the buyer’s side, many family offices, asset managers, HNIWs appreciate these concepts. This market is less transparent, more communication-intensive, and is growing.

In sales, classic push concepts fail here, as they damage the reputation of the fund initiator. Even though the concepts are often advertised “semi-decently” in public, in the medium to long term these concepts have less need to get into a constant greyhound race in a performance hit lists. Funds are usually distributed less aggressively here than by inviting rather interested target groups to co-invest. Only if the approach is understood by the counterpart, the claim to long-term performance is right, the serious pull factor can be effective. Incidentally, this phenomenon is not only found in the area of liquid investments but in all investments where the focus is on trust in the expertise and the players involved. Angel investments, venture capital, private equity, and direct investments also have an entire market segment here that is, so to speak, passing by parts of the classic provider industry. Here the German proverb for the marketing sector proves true: “To have to go is hard. To be allowed is tender”.


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