Fund Launches Return Despite Continued Uncertainty
Lockdowns in the spring forced many investment managers to put on hold their plans to launch new funds; the uncertainty around the direction of markets and the inability to meet potential investors face to face meant a temporary freeze in fundraising activity whilst the investment world tried to figure out how to work from home effectively (and how to stay in business).
Six months into the remote working zeitgeist, hedge fund and private markets fund managers are now bringing new products to the market in droves.
“In March and April, most managers were on the sidelines trying to gauge what was going on,” said Kevin Cott, Managing Partner at Cott Law Group, which advises investment managers on fund formation. “But we have seen a pick-up in activity. Actually, Q3 this year was our busiest quarter on record for new funds from hedge and private markets managers.”
Robert Mirsky, Principal and Head of Asset Management at EisnerAmper, is seeing a similar hike in activity.
“Post-summer, new funds coming to market has really taken off. We’re working on half a dozen-plus launches right now which we expect to launch before the new year. I wouldn’t have thought that this would be the case back in the spring.”
The increase in activity can be attributed to not only a backlog of funds that were slated to launch earlier in the year deciding to resurrect their launch plans but also new funds which began incubating their plans during the lockdowns. Strategy-wise, trends are emerging.
“In the hedge fund space, we’re seeing a lot of long/short equity – much more so than we saw last year. Also, there are a lot of distressed debt funds looking to launch. On the private markets side, interestingly we’re seeing some real estate funds coming to market. They think there’s going to be an opportunity in that space in the next few years,” said Cott.
Mirsky says that most of the private markets funds that come across his desk are coming out of established managers as opposed to completely new managers coming to market with their products. For those new managers launching funds in the venture capital space, he says that Covid-19 has likely had an impact on what he’s seeing.
“While established managers are launching more new products than brand new managers, we’re certainly seeing some brand new managers come to market as well. A lot of the new products are focused on healthcare and life sciences, which is probably not surprising,” he said. “Medtech is an area of interest for the VCs right now. This was the case pre-Covid, but it’s even more so now.”
In the hedge fund space, where most managers are perpetually capital raising, that part of their business has picked up now that managers and allocators are more comfortable with working remotely. Gary Clifford-Newman, Vice President, Prime Services Sales at Sova Capital in London, says that recently, he’s seen success in digital capital raising.
“Back in March and April, everyone was focused on their operational set up – as the day to day running of a hedge fund was completely turned on its head. Many managers were concerned how they were going to raise any additional AUM without looking in the whites of a potential investor’s eyes,” he said. “But a lot of the managers we work with are telling me that they are now having more and more positive virtual meetings with family offices. I have seen one manager achieve a large ticket purely through virtual meetings from cold. That wasn’t happening in March or April.”
“Across the world, people are becoming accustomed to zoom chats and web conferences. I think that translates to the capital raising space. It allows them to continue to get in front of investors by a different medium. One of the reasons things were so difficult in Q2, aside from general anxiety about the world, is that people hadn’t figured out how to meet and do a Zoom call and make that a new normal. The industry is recalibrating now to a certain degree.”
Hedge fund managers in the market with new funds are facing a changed capital raising environment, not only because of the need to conduct investor meetings digitally. Prime brokers, a source of potential investor referrals, have been changing their offerings.
“Some prime brokers have pulled out of certain products and / or markets and reduced their services – it’s just not possible to service clients in the same way in a remote environment compared to an in-person one. Some mini primes were already re-evaluating their suite of services before the pandemic hit. Covid has accelerated their decisions, and smaller, newer hedge funds are facing a changed landscape versus what they enjoyed previously when it comes to services,” said Clifford-Newman.
To add assets in the new capital raising paradigm, managers must make sure that they communicate to their investors that they are prepared structurally to succeed.
“Managers of all strategies need to show that they’re here for the long term. They need to show that they have adequate operational money to run their businesses and invest in the right technology. From an AUM raising perspective, managers should demonstrate a preparedness for delay – if lockdowns come back, they need to show their investors that they have best of breed kit to protect their client’s money while the world retreats again,” Clifford-Newman said.
Managers who tick the 'structurally secure' boxes in an operational due diligence review may indeed be better positioned for capital raising success. Regardless of whether they have the required infrastructure or not, Mirsky thinks that the recent bounce in new hedge and private markets funds launching is because, despite continued uncertainty, managers now just want to get on with it.
“It was taking longer to raise money, but people have gotten used to it at this point,” he said. “Fund launches and asset raising slowed down because of a lack of processes in place but now it’s moving forward. Life goes on; that goes for the investors and the due diligence people as well as for the fund managers. If there are more lockdowns or tighter lockdowns we won’t have a situation like we did in the spring where new fund launches will dry up again because people are used to this new way of working.”
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