Comment: Fund Boutiques – Due Diligence, Seed Money and Family Offices

“Don’t you even have an idea?”, “We only need 5 million euros, then the fund can start” – this or similar is how the statements of fund initiators on seed-money searches often sound. Many steps in the search phase for seed money when funds are set up are reminiscent of the search for start-up financing or fundraising in the field of conventional sponsorship. The situation is different from the classic search for seed investors when existing products and services are used to approach investors. What types of fund managers are looking for seed money? What do investors think about due diligence and communication offensives? Which stumbling blocks might need to be cleared?

Types of seed money seekers

If one takes a closer look at the structure of seed-money-seeking firms in the asset management sector, one can distinguish certain types (very roughly):
1) Established product provider with an organically grown network in the investor sector.
2) Established product provider with the organically grown distribution network and selectively grown seed investor network.
3) Non-established product provider without a well-developed distribution network with opportunistically designed seed-investor communication.

It seems interesting that in certain companies the degree of awareness and the distribution network is hardly related to each other. Under certain circumstances, contact strength in the sales area can even be a hindrance to the seed money approach. Many investors reject the continuous “aggressive” approach for seemingly unrivaled, unique new fund concepts.

Possible stumbling blocks in the search for seed money

Established product suppliers with established networks generally have fewer problems convincing seed investors for the existing product range and new concepts. The seeding pipeline is running like clockwork. Apparently because here, too, the engine can sometimes start to stutter when new types of investors need to be approached. Network and product range only coincide indirectly.

With established product providers – which also include “small” fund boutiques – with only a continuously and selectively expanded seed investor network, it can be seen in many cases that a form of first, successful “lucky strike” was achieved with the core product at the beginning of the company’s history, so to speak. Here, too, one encounters the phenomenon that it is very difficult for the respective address to seed new products.

The third group of seed money seekers is increasing to be found in the area of “fundraising”. The size and communication strength of the providers are not necessarily directly related here either. Of course, there are often concepts here that, no matter how strong the communication efforts (direct approach to investors), have such glaring weaknesses that it would be necessary from a business management point of view to obtain a definitive “no” from potential investors as quickly as possible.

Opportunities for attractive concepts

In the current phase of low-interest rates, many seed investors have become noticeably more interested in convincing new concepts for funds. Even asset classes for which disinterest was shown in earlier times are now being given the chance, at least in a first step, to be subjected to a due diligence light at all. Many fund initiators often forget that dealing with more complex approaches means a considerable expenditure of time for every seed investor. This expenditure of time and the opportunity costs involved in receiving “sales calls” often lead to a rather unfortunate process of rejecting or not taking up interesting investment opportunities.

Many of the seed investors understandably hold back in the direction of their visibility. Certain family offices keep their profile low. Many other groups of investors who seed regularly are even often overlooked in the market and are not initially approached. In direct discussions, it is even occasionally regretted that certain projects do not find their way to this group. From an information-economical point of view, this position seems at least worth considering. To be fair, however, one must admit that the optimal investment is usually not available. Rather, many of the providers are involved in the seeding process, whose concepts are relatively promptly included in the investors’ “relevant set”. If the essential parameters are met in the due diligence process, B and C solutions may also be used. Many A concept in the fund launch area may never have come to fruition because, on the one hand, one spoke too late with relevant investors or, on the other hand, one communicated too long with the wrong kind of potential seed money providers.

Investment companies – administrator and contact platform

Many of the investment companies such as Universal-Investment, Ampega, Axxion, and other specialized service providers in the private label fund sector are considered the first point of contact for planned fund launches. Of course, these companies earn money by providing administrative support for fund requirements, and certain institutions also offer sales support for existing fund products. The concept of review competence in these houses is often forgotten. In individual cases, a seed investor contact may be established, but this is not the core service of these know-how carriers. What is decisive is that many concepts would be viable if the time and cost schedule of the fund initiators were accompanied by a stringent strategy.

Successful concepts usually become known to providers and investors themselves through their implementation. What is less talked about? With the many “suffering” or “dying” concepts, certain basic craftsmanship principles may have been given too little attention right from the start. Often there is no match between pure desire and professional goal. In the end, the principle of hectic activism rather than a strategic approach applies. Potential seed investors have often developed a feeling for the desperation, frustration, and time pressure the fund initiator has to deal with. Similar to the situation when starting up a new business or selling a company: time pressure and financially tight margins are often bad prerequisites for a successful search for seed investors.

Relaxed dialogue is required

Many investors are looking for interesting investment concepts. Even concepts with a solid technical background – track record, team, the personality of the manager, etc. – are still received with interest. If you address the right addresses, you often break down open doors. The prerequisite is that a relaxed dialogue is established. Positive resonance on the investor side is also generated when a “no” or “maybe” to the concept idea is quickly received and accepted by the initiators. It is also an advantage if one is perhaps also interested in the investor’s topics, which do not necessarily have to be directly linked to the initiator’s seeding interest. Professionalism or not – most people are reluctant to be seen as a mere means to an end.

A sincere interest in the problems of the respective target group requires a well-founded interest in the content of their topics. An isolated sales interest driven by pressure does not necessarily generate sustained enthusiasm among certain investor groups for further dialogue. In the end, as is so often the case when talking to and establishing contact with investors, most people find an exchange of ideas that is professional for both sides and has a certain openness to results is pleasant!

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