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Alternative Assets Fundraising: Investor Relations Matters More Than Fund Performance

A strong track record of investment performance is always the most important factor for asset managers looking to attract capital: that’s what the conventional wisdom would have us believe. But a recent Chestnut Advisory study reached a very different conclusion. According to an analysis of asset flows and testimonials by institutional investors, performance is actually lower on the list of deciding factors.

What’s at the top? Effective investor relations.

Asset managers who establish trust through communications and support appear to be more successful at raising money than those who perform well but fall short in client outreach and education. In fact, 92 percent of institutional investors surveyed said that they consider IR to be integral to an asset manager’s mission. Those firms that lead on the communications front outpace IR laggards when it comes to retaining capital and leveraging client relationships as well:

The survey shows that trusted asset managers raise more assets, are hired more quickly and are fired more slowly than the general population of asset managers. They also have an easier time cross-selling and up-selling their clients.

And the study yields data to back up these assertions. In evaluating asset flows for 931 investment products for the period 2006 to 2013 across four different asset categories, Chestnut discovered the following:

  • Top investment performers raised less than 25% of the capital of top asset accumulators.
  • Asset managers with successful IR efforts brought in $133 billion more than managers with the best returns over that time period.
  • While the worst investment performers lost $14 billion in redemptions over that period, the firms that had the worst net asset flows—presumably, those that did not earn investors’ trust—lost more than $106 billion.

The Navatar View:

Investment managers continue to face the challenge of commoditization. Investment strategies, processes, return streams can often look very similar to an investor.

There is a lesson here for smaller and mid-sized managers: devoting resources strategically to outstanding investor relations is what can separate leaders from laggards in the marketplace.

Gone are the days when LP communication simply meant periodically uploading documents in a secure virtual data room. Asset Managers cannot afford to operate like the IR groups of public companies 40 years ago, when they simply issued dry, rote 10-Ks and did not cultivate any relationship with their investors.

A good investor relations program must be based on a solid understanding of investor segments and their needs, with a comprehensive communications strategy to address those needs, as well as sophisticated technology such as Navatar Investor to automate the process.

Chestnut concludes:

Aside from delivering strong investment performance, asset managers have many other important duties, including establishing a strong firm culture, documenting and implementing impeccable compliance, recruiting, incenting and retaining talent, and much more. Each operational element provides the opportunity for an asset manager who excels at that piece to share this excellence with their clients and prospects. Over time, a consistent effort to educate the marketplace about a particular asset manager’s strengths builds a strong brand and investor trust, making that asset manager less reliant on near-term investment performance to maintain and grow its business.

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