Finance crisis, procyclicality in product policy, short-term thinking – these are all critical points that the financial industry worldwide has to deal with. On many of these points, dialogue with critical investors and other participants is not avoided. The financial industry and many PR experts have probably recognized that transparency and willingness to engage in a dialog are required. Perhaps it is also an impression of resignation and capitulation – too many negative things have been discussed in the media in recent years.
In the last quarter, Universal-Investment and Union Investment published studies that described the increased interest of institutional investors in real assets. The positive tenor of the study can certainly give hope.
Investments in the solar, wind, agricultural, and forestry sectors are more often associated with the label “long-term thinking” and “sustainability”. More differentiated approaches also allow for a critical pro and contra discussion that is in flux. What business potential could the described trend offer for investment companies? What could an ideal project look like?
Investment companies and procyclicality among fund initiators
Many patterns and structures can be found in similar facets in different industries – or even in the same industry. From the field of fund boutiques and private label funds, the quality spread in fund projects is well known. In short, admittedly a “rough wedge”:
a) Projects that arise from pure opportunism
b) Projects that at first glance do not appear to be a self-runner, but have potential
c) Projects where fund project parameters are consistent, i.e. desired projects for investment companies
In simple terms, these structures can also be applied to the area of real assets fund requirements. An additional complicating factor here is perhaps in many cases the fact that a financial expert discusses projects with a financial expert, in which the “underlying” could often require additional technical competence (power plants, agriculture, renewable energies, and technology as keywords).
Project types – binding of consulting capacity at Investment companies
Project variant “Plain vanilla opportunism
The project variants described above tie up resources in the daily business of investment companies. AIFM guideline, a slump in sales at closed-end investment companies, attention among investors – all possible reasons for employees to change camp and feel called upon to become real asset managers or “general contractors”.
Frequently, these projects brought to the attention of investment companies fail because know-how is only available in fragments or even sufficient, but no seed money is available and no budget is available to initiate an economically viable project. Opportunism as a driver (“Real Asset is a thing that is currently doing well”, etc.) leads to long discussions in combination with a polite rejection or reference to resubmission. The fund initiators often forget that investment companies also have to manage reputation risk in the long run with this kind of project category. It would be fatal if the own fund edition project portfolio was later burdened with a large number of “foot-ill” projects.
Project variant “Not a self-runner
Many know-how carriers are excellently networked in the industry. Who has the technological know-how and network? Who perhaps already have some experience in advising fund projects in the real assets sector – or who can at least make it more or less credible than they could successfully implement their first project.
Goodwill is there, know-how is there – as so often, there is a lack of seed money for the project. In contrast to the group of opportunists, the efforts in this project category are often accompanied by own resources (time, personnel, budget). This is viewed positively by the investment company, but here too the following applies: no seed money, time frame until realization still uncertain – that means back to the start. Status: benevolent observation by the investment company, stay in touch, communicate project status regularly: Such projects can be realized.
Often the timeline is seriously misjudged. Allocations of internal and external resources are often only made after long internal discussion processes at the potential initiator. Strategic bottlenecks here are often points such as no central project management, insufficient budgets, and underestimation of the time required to approach potential investors and professional “sounding boards”. Often “only” a project idea sketch is available – as in the field of art, it boils down to the question: Who will finance my potentially profitable “bird”?
Project variant “Potential self-runner
It can be said that “self-runners” in this sense are rare. With some restraint, one can describe such fund projects as “self-running”, with which optimally already before by the fund initiator a fund project was successfully “managed”. Optimally, the potential fund initiator already has a name in the industry, an excellent track record in its segment (renewable energies, e.g. established wind turbine manufacturers, etc.). The investment company’s advisor may be even more pleased to be informed that this type of project has been in operation for years with institutional investors. Optimal in connection with this is already the promise of potential seed money donors. There are “wish you-what-projects” of this kind on the market, as is the case with good real estate: the “fillet pieces” are quickly placed. Optimal initiator, optimal investment company, and seed money – a good mix to start a successful fund launch project.
Potential: Domestic and international – quality combined with attractive returns is in demand
Of course, the project types sketched above very much like woodcuts are a reduced variant quiver. One can find various attenuations or alternative expressions. Opportunism, for example, is not per se the motivational structure of just one fund initiator group, the mix does it in the end. Exaggerations and ideal types may make it easier for one or the other fund initiator in the real assets sector (real estate, gold, etc. have been deliberately excluded here) to determine the location. Quality, time, and resources are usually the essential set screws for the described type of fund launch projects.
An example: The main motivation for the new edition can neither be the consequences of the AIFM implementation for the closed-end fund sector in the described area, if only for risk management reasons. A previously good employee does not necessarily have to be a good fund manager. Even lawyers, as well as other external service providers, nowadays often work on a prepayment basis for such recognizable project designs, as they do not consider themselves a charitable institution for “distressed” fund initiators.
The rough grid applies not only to projects of domestic fund initiators but also to potential foreign fund initiators from the real assets sector. There may be excellent addresses with a proven expertise (e.g. agriculture or forestry) from Asia or Latin America. Of course, the relevant market for attractive fund launch projects for German investment companies (including the Luxembourg option, if applicable) would be considerably expanded. As a know-how center, investment companies could offer added value here, especially in Germany, as the first point of contact.
Outlook: Potential bottleneck factor communication and personnel
AIFM, UCITS, etc. – many regulatory trends often give reason to think about new business models or optimize old models. As know-how pools (not only in the area of real assets), investment companies offer an ideal first contact point for the discussion of fund projects. The landscape of investment companies is, as so often, in motion: Change is the standard program. Takeovers, mergers, foreign business models, regulation – everything can be seen as a risk or an opportunity. However, when viewed in isolation, it can be said that the universe of excellent fund projects appears very attractive, even when considering the global real asset market.
Critical bottleneck factors regarding identification and acquisition of fund projects could be, for example, personnel and communication. Those investment companies that demonstrably expand their know-how in the real asset sector, communicate it consistently in the market, and whose business model is more proactively addressing high-quality project candidates in Germany and abroad, will benefit in the medium to long term. This also means the expansion of qualified personnel and know-how. Even in the “regular” private label fund business, it is already difficult to recruit suitable people with all interface skills in the area of fund launch. Some positions need a longer time to be filled these days even personnel consultants act here rather as “hunters of the lost treasure”!
*) Markus Hill is an independent asset management consultant in Frankfurt am Main.
Contact: info(at)markus-hill.com or www.markus-hill.com.