WEBINAR TRANSCRIPT

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Nicholas Donato: Hi folks. Welcome to today’s webinar, where we will be discussing how to segment the LP community in order to boost your fundraising. Not every LP is alike, and so we’ll present some really interesting research into investor wants, broken down by LP type. I’m Navatar’s Nick Donato. I’ll be your moderator. I’m joined today by Amanda Tepper and Brandon Gersch of AM 20/20, which is a support platform for sales and marketing professionals in the asset management industry. So what they do is provide asset managers research on institutional investors, and also provide a forum for those managers to discuss and share that LP knowledge.

Some quick housekeeping too, a recording of the webinar will be emailed to all of you in the coming days, so look for that in your inbox. That will include a copy of the slides as well. Also, I encourage you to submit questions, using the GoTo widget tool on your screen there. Brandon and Amanda will field those questions as they deliver their presentation, but I’m also going to take some time here at the end to relay some of those questions that may be better left for the end.

Now very quickly, how does Navatar fit in to this picture? Well, we are a cloud provider, and one that is fully dedicated to the financial services industry. What we do is provide asset managers and others, the industry’s first connected growth platform, which is a way to combine your relationship management, fundraising, deal management, secure document exchange, and certain other workflows together on to one shared system. The platform is built on top of Salesforce, but it’s been customized to meet the needs and the workflows of the private equity industry. And we have a support team that really knows their stuff, as private equity service specialists. So without further ado, Amanda and Brandon, we are excited to see your research, and I know that you are excited to present it.

Brandon Gersch: Well, thank you, Nick and everyone at Navatar, and thank you for joining us today. I’m Brandon Gersch and a AM 20/20 advisor and I’m excited that you’re with us, because we do have a fantastic presentation, with actionable insights and best practice takeaways that will make you more effective and efficient. Through our research and interviews with institutional investors and consultants, your clients and target prospects, we learn what they want from you and other asset managers, what they don’t want, and what drives their decision making processes to hire and retain asset managers. Our mission is to arm business development, sales and marketing teams and asset managers, with actionable insights to build your business more effectively and efficiently. Our member firms are using our recommended best practices to raise the standard of excellence across the industry, and in the process, they’re winning new mandates more quickly and retaining those assets longer. So, today Navatar convinced us to share a sampling from a few of our recent members-only reports, to help you and your firm understand just what your clients and target prospects want from you. So though all lines are muted, we’ll be welcoming questions throughout the presentation, via the Q&A box on the lower right hand corner of your screen, and we want this session to be as interactive as possible.

We’ll address each of your questions, so please, don’t be shy. What we’re looking at here on the page, is a survey methodology for how we conduct our investor research reports. It’s just one example, from one of the many reports that we conduct with institutional investors and consultants. And what you’ll see here is that we scan the market across the institutional marketplace of North America, across government, corporate, EMF, pension, family, office, and consultants as well. And without further ado, I’ll hand it over to Amanda.

Amanda Tepper: Thanks, Brandon and thanks, Nick, and thank all of you for dialing in today. So, this next page on investor trust really gets to the heart of what we are trying to help our members at AM 20/20 do here. So, this comes from one of our first pieces of market research that we did for members. And if you look at the chart on the bottom, you can see the average time to hire an asset manager, it’s actually gotten longer in the last couple of years. But you can see there’s a huge difference in how long it takes for an investor to hire a typical asset manager to close the mandate from start to finish, almost a year, we think that’s close to 18 months now, and how long it takes when they have an asset manager who they view as highly trusted.

So it’s half the time, or even more than half the time, it can save you six to nine months. So everything we do at AM 20/20 is aimed at getting our members into that highly trusted bucket. So then the question is, “Okay, what do we do? Is there a silver bullet?” While there’s no one magic thing you can do to become highly trusted.

The good news is, the top five factors driving the decision to hire any asset manager are all 100 percent under your control, and you can see that list here. So we gave consultants and investors a list of about 15 things, and asked them how important each one is. And you can see by far, number one is they need to understand what you’re doing with their money. And the other four items, all have to do with various versions of them understanding what you’re doing and trusting you, various elements of your business. What’s not here that most asset managers would expect to be here and in fact, that most asset managers would expect to be number one on this list, is your investment performance. It’s not in the top five. We’ve done lots of research on this, that’s a consistent finding. So as I said, the good news is that all of these factors are under your control but when you start looking at the marketplace, it’s not a homogeneous marketplace at all. There’s lots of different segments, they want lots of different things. And translating a strong understanding, for instance, of your investment process to any one segment, is going to be different, depending on what that segment’s worried about. So as we turn to the next slide, this is some research that we conducted recently, asking, “What are you really worried about, what are your top concerns?” And you can see that different types of investors are worried about different types of things.

So across the bottom of this page, you can see the four major segments of the institutional investor marketplace. And there are more, but these are generally the biggest: Corporates, governments, endowments foundations and family offices. And we’re ranking their top five concerns by each segment. And so just looking at it, first of all, you can see that they’re worried about different things. And so let’s peel that back a little bit. If you, and some of you may have already done some client segmentation efforts yourself, to try to figure out which of these four big segments are the best markets for you. That’s something we encourage all of our members to do. But this will just give you a little taste of what folks are worried about in the various groups. So corporate plan sponsors, you can see by far, their biggest worry is interest rates. Almost 90 percent of corporate plan sponsors rated that by far, their top worry, when they think about their own portfolio. Why would that be? The main reason, is that on the public corporate pension side, they have to report their results and the over or under funding through their P&L every quarter, and that’s highly impacted by the discount rate. So next quarter, we’re going to see a lot of issues as a result of the election and the rates moving up, that’s going to hurt them a lot.

So we’ll have to keep our eyes on that, but that’s what they’re worried about. If you turn to endowments foundations and family offices, however, on this page, they’re not worried about interest rates, but they’re very worried about the high correlation of volatility across their portfolios, which doesn’t worry corporate plan or government plan sponsors. The main reason for that, is that both endowments and foundations, and family offices, are living off their portfolios. They are drawing down at least the income, and sometimes a little bit of the principal every single quarter. So they cannot afford a big drawdown. If they have even one big drawdown, it will take them years to make it up. So just looking at that, without getting into all the other data that’s on this page, you can start to see some implications, depending on your product and the attributes of your product, as to which segments you might target. So for instance, if you had a highly uncorrelated product that was also pretty tied to interest rate risk, but otherwise uncorrelated to all major products, we would point you to endowments foundations and family offices. And then the message that you’re going to use to best resonate with your target segments also falls out of that. So if we turn to the next page…

We’re just going to dig a little deeper into the worries about rates. So governments are most worried about their overall portfolio performance and their fixed income exposure, which is logical and kind of what you’d expect. As I mentioned earlier, the corporates are most worried about the funded status and how that’s going to hit their P&L. And this is interesting, less than half of respondents are using any kind of investment products to manage their interest rate risk. So that’s an opportunity, if you have a product that happens to address that. And here we’re looking in this chart at the worry behind the worry. So why are interest rates your single most pressing risk? The first two columns are the governments, primarily. They are worried about rising rates on the fixed-income portion and the overall portfolio, and corporates are much more worried about their funded status. Other plans have to deal with the funded status, but they’re not so worried about it.

So on the next slide, we dig a little deeper into volatility concerns. And you can see that it was a big issue for endowments and family offices, as we mentioned previously. And the reason behind it you can see here is the drawdown risk. Governments are more worried about smoothing their returns. So, they just have a lot of headline risk. The problem with them if they have a drawdown, is explaining why, that they’re not investing for next quarter, they’re actually investing for the next 30 years. Corporates are looking for the best mix, so they’re looking at it from a higher level. So this again, just depending on what your product is and what your market is, gives you a lot of ammunition to use in your marketing and messaging and sales approach. So now, let’s look at an asset class.

On the next slide, you’re going to see we look at hedge funds. This is from another report we did. The market has a pretty wide range of opinions and uses for hedge funds as well. You can see here that different investor segments are using hedge funds differently, to meet the various needs that they’ve got. Again, on the corporate and the government side, the main reason they’re using hedge funds, is to diversify their portfolio. So really, that’s the classic use that I think most asset managers with in catch funds would be used for by investors. They’re trying to hit that perfect point of maximizing risk and return in their portfolios. However, endowments foundations and family offices, by far, the main reason they’ve got hedge funds in their portfolios is to avoid drawdowns, they want to mitigate risk.

And we also, in our research, always look at it by size of allocator. And you’d think it’s intuitive, but it’s nice to know explicitly, because again, it can drive a difference in your messaging and your targeting. Larger plans are looking to maximize risk return and the small plans just can’t afford a drawdown, they are very focused on the risk mitigation. So, with that as a backdrop, there’s been a lot of news recently about hedge funds losing capital. If you are a hedge fund, where to turn? So, we did a little digging of that in our research, that’s on the next slide. Family offices are the most likely to be allocating additional capital to hedge funds. So here we asked investors, “Do you currently invest in hedge funds at all? And do you have any plans to allocate additional capital over the next 12 months?” So, a couple of interesting takeaways. Corporates, not a lot of hedge funds there, and even governments, it’s just a little over half. So in some really big pools of capital, there’s still a lot of room for market growth, however, across the board, there’s less capital going in in the next 12 months than there is currently. So, not surprising that we’re seeing outflows now. But interestingly, that the biggest percentage to invest is family offices, and then endowments and foundations.

So, all our hedge fund clients were pointing them to those segments, in terms of focusing for fundraising and retention. So if performance isn’t what drives your success in the marketplace as an asset manager, then it must be fees, right? If we turn to the next page…

A lot of our members were asking us about fees, and that’s another topic that’s been in the news quite a bit. So we did research, and found that it actually is not that big of a piece of manager selection. So, only 41 percent of investors and consultants we spoke with would even rate fees as a top three factor. So, if you look at that chart there on the right, another way of looking at this, is 55 percent don’t even look at price as a top three factor. In the initial screen, it’s only a quarter of allocators, who even look at fees when they’re first trying to figure out who to hire. So, this is something to take into account as you approach the market. Now that said, within the segments, corporate DC plan sponsors are by far, the most price-sensitive, which makes sense when you think about the transparency of their structure to their end users.

For them, over 75 percent say price is a top three factor. So that’s an issue. We do sometimes get a question about fees. And one thing that’s not on this page that we put in the report, is our top recommendation here, is that we found that most allocators actually have no idea what they’re paying. Once they’ve hired asset managers, nobody ever talks about it, and it actually makes the manager very vulnerable. So we have recommended that all our members have at least an annual conversation about their all-in value proposition, which would include all the thought leadership they’ve delivered. So any meetings, any site visits, any special calls with analysts, all the one-off questions you’ve answered, really pull it together for them that the clients have taken that and put it into action have seen their retention go up over the last year.

Brandon Gersch: A great question. Pardon me for interrupting. Allen asked a great question. He wants to know, “The recent election raised a lot of questions about the reliability of polling itself. Can you help us understand how you gathered this hedge fund data?”

Amanda Tepper: Oh yes, that definitely raises a good question. So, how do we do our research? We have at this point, because we’ve been doing it for several years, we have a really nice group of allocators and consultants who’ve agreed to be part of our permanent thought leadership panel and periodically, do phone calls with us. We do all our research by phone, that way we know we’re actually talking to the CIO and not his admin, who he forwarded the email to. And you’ll see, on the next couple of pages, we have quotes, we get really good color from them, so it isn’t just numbers. And we tell them it’s not for attribution, so that’s how we’re able to put them into groups but you’ll never see us saying that CalPERS said this. So they’re much more likely to be open with us. They don’t get the full member reports that we publish for our members, but they do get the data, which they appreciate. They like to see where they are with everyone else. And the other thing I’ll say, a lot of managers ask us, “How do you get these guys to speak to you, because I can’t get them on the phone. They don’t want to to talk to me.” Well what we found is that no one ever asked them what they think. They’re being talked at all day long, and some of them are dying to share their views, they’re very opinionated.

Consultants, even, we have a hard time getting them off the phone sometimes. But directly to your question, how do we know that they’re telling us the truth? Hopefully, and I’m not going to go any further here than just to say there was a lot of judgment and there still is, involved in the presidential election that just happened. And it appears now, in retrospect, that people were ashamed to say they were voting a certain way, it wasn’t politically incorrect. What we’re asking is all pretty straightforward. I don’t think anyone in this industry is shy. So if fees were a factor, they would say so, there’s no shame involved, we try to make it as open as possible. So hopefully that helps.

Alright. So turning to the next page, what about negotiating fees? So yeah, it doesn’t matter, but now they’re about to hire you. You’ve been through that super long process. What about the negotiations? So again, it’s intuitive when you think about it, but how helpful to have this when you’re going into it? Not even 15 percent of allocators that are below a billion negotiate more than half the time. So keep that in mind as you go, and the bigger they are, the more likely they are to negotiate makes sense.

When they do negotiate, this is another I think very valuable factoid. They generally get about a 10 percent to 15 percent discount. So good for you to know as an asset manager, going into it. And here’s a quote from this endowment CIO who we spoke to for this particular piece of research, just to give you a sense of the type of color we get from conducting all these phone interviews. “So if it’s not fees and it’s not performance, how about consultants?” So on this next slide, this is just a small piece of the data from the full deep research report. We actually did two reports on consultants, because they’re such huge gatekeepers. We did one with investors, and we actually also spoke to a bunch of asset managers and did our peer research. So, what are the top factors driving consultants to have trust in an asset manager? And you can see these two really terrific quotes on the right. What you don’t see on this page anywhere is performance. They want to understand what you’re doing. Here they’re giving some very specific things you can do as an asset manager to build their trust, like having very strong intellectual capital, providing them regular updates on firm developments. This is all directly under your control. So, what can you do with all of this to improve your business day to day? On the next slide, we have a couple of action steps.

Amanda Tepper: So every AM 20/20 Report contains detailed action steps, that helps our members raise their capital more quickly and retain it longer, and we just pulled a couple for today’s webinar. So we would definitely recommend that all asset managers invest resources to identify their bullseye target investors, do some type of research. Asset managers should then once they know who they’re aiming at, they should focus their message around whatever attributes they’ve got, you the asset manager has, that will best address the needs of your bullseye target. Asset managers absolutely don’t focus your message on your performance track record, that’s just not going to get you where you want to go. And make sure you make an effort to educate consultants. They, like everyone else, they’re looking for trust. So with that Brandon, I’ll hand it back over to you.

Brandon Gersch: Great, thank you, Amanda. So just as a quick recap here on the next slide. What we’ll see ultimately is that what we are is a community of leaders and asset management business development. Through our investor research, where we’re interviewing institutional investors and consultants, our peer research where we’re interviewing folks just like yourself who are leading asset management firms, as well as our community events, we are establishing and promulgating best practices across the industry. And our member firms are using our recommended best practices to raise the standard of excellence across the industry, and in the process, they are winning new mandates more quickly and retaining those assets longer. So what you’ll see on the following slide is a little bit of contact info. We’re more than happy to answer some questions, and would love to chat with you about the different concerns or issues you’re facing. So please feel free to reach out directly to us. If there’s any questions from the webinar, we’d love to hear from you. And with that, I’ll toss it back over to Nick.

Nicholas Donato: Thank you, Amanda, and thank you, Brandon. It was especially fascinating to hear that performance may have less to do with fundraising than some probably imagine. I’m going to shift this over to audience questions very soon. And we have a number of interesting questions coming in. But first of all, I want to provide a visual on how to execute some of the points that we heard today. We have on the line here, Navatar’s Head of Products, Ketan Khandkar. Ketan, we heard Amanda make the point that asset managers need to build better intelligence on the LP community. We heard that performance is not a top five factor for hiring LPs, which speaks to the importance of marketing, investor relations and transparency. So Ketan, can you take one or two minutes here to show the audience how technology helps those goals in a more visual sense?

Ketan Khandkar: Sure, I’d be happy to, Nick. Let me take a few simple examples to illustrate how some of the points that we heard today, you can put in practice. So, the first thing was around investors and being able to know your investors and gather intelligence about your investors. The key there, and I’ll go to an example, as I said, the key here is to be able to structure and classify all the information that you’re collecting. So any time you’re looking at an investor, you should be easily able to see who their consultants are. Consulting relationships are important and it’s important to know who their consultants are so you can manage all of that. You should also be able to see all your communication that you’ve had, so meetings and conversations that you’ve had with your investors. Going one level deeper, as you learn about the investors, it’s very important to be able to categorize these things, so to know what is the investor interested in? Because all these things then ultimately lead you to target the right investors. There’s a slide which said ‘bullseye target investors’. And the key there is to know who they are and to be able to reach out to these investors. So, the next time if you have this information, if you’re raising a fund, for example, you should be able to just go in here and say, “Show me all the investors who are interested in a specific type of strategy.”

So I could go and say, “Show me all my mezzanine and bridge fund investors,” because those are the investors that I want to reach out to. So, you should be able to search quickly and identify, and then this becomes the right target to go after. And as you manage these processes, make sure you’re talking to your investors on a periodic basis, and these conversations obviously have to be relevant. But tools like these allow you to understand obviously who your top investors are, and make sure that you are in fact, reaching out to them. And at the same time, putting in some risk mitigation in here, so that you can see, “Hey, here are investors that we’ve not reached out to in over three months.” So these are some simple examples that we thought we could include to highlight some of the points that were covered in the research. With that, let’s go back to the slides, Nick.

Nicholas Donato: Thanks, Ketan. One of the first questions coming in is asking, “Who is the authority in industry LP targeting?” If I were to take that one, there’s a number of data providers who host thousands of profiles on different types of LPs, broken down by investor type. Preqin is what you saw in the demo there. And then by integrating Preqin with the same system that’s responsible for your relationship management, you should be able to essentially click and drop those LP names and contact information right there into the same system that you’re using for fundraising. Amanda, would you agree with that? Again, the question is about who is the authority in industry LP targeting?

Amanda Tepper: If that question is a database, you could take it a number of ways. I would say, so industry LP targeting if you’re saying, who is going to find the most likely investors for a private equity firm? You said Preqin has probably the most, I don’t even know, but they’ve got certainly a very well known and comprehensive database of potential investors. But in terms of who’s going to be the best one for your fund, we would recommend that you do your own digging before you go out there, because it’s a gigantic database and it’s the difference between broadcasting some message to everybody.

Nicholas Donato: I think that’s right. So it would seem that you could use a tool like Navatar, it comes integrated with those data providers to find your LPs, and then create automatic workflows, depending on how interested an LP may be or based on the type they are. And then use research like AM 20/20 which lets you know, what do these LPs care about?

Another question coming in, this is pretty interesting. Someone is saying that they’re top quintile in performance, but they’re still having a hard time raising new assets. And the person is saying that the CIO is blaming her and she says that, I think it’s her message, “But the CIO won’t follow a script, what can I do?”

Amanda Tepper: Yeah, we get that, we get versions of that a lot. So as you saw with the data, performance isn’t going to do it for you. So one thing is to share some of this data with your CIO because from where the CIO is sitting, they’re doing their job, and the money should just be flowing in. So, obviously, it must be you, the salesperson, who’s just not getting the right meetings. The reality is, if you’re top quintile in performance, you may very well, while you’re in that nice place, attract some fast money, but they don’t understand you well and it won’t stick around when you fall out of the top quintile. So you really can’t fill the business on that. In terms of getting the CIO to stay on message, that goes back to educating your investment team as to what investors really want, and what message will resonate with them over time.

Nicholas Donato: So Amanda, here’s another interesting one for you. Someone is saying that if the most important thing is explaining the firm’s investment process and that PMs are private, they don’t want to give away the secret sauce, how can I show them how we can do a better job?

Amanda Tepper: There’s a big difference between really sharing the secret sauce, and explaining something at a level that most investors will understand. So even in the institutional investor marketplace, if you look at the largest single pool of money there, which is government plans, the ultimate decision makers there are lay board members. So these will be firemen, police officers, retired teachers. So they’re educated, they’re smart, they don’t know anything about the capital markets though, but they’re not going to hire you if they don’t feel that they understand what you do. So, if you are, say, a quant macro fund. They don’t even want to know what all your factors are, and how the formulas work, and how you apply them in different scenarios. And if you start using words like “factors” in your final presentation, frankly you’re going to lose them. But you need to explain what you’re doing in such a way that they do understand. So, you don’t need to share your secret sauce but you do need to be able to tell the story in a way that will resonate with everyone. Now consultants may start to get down to the factor level a little bit, and then that’s a one-on-one conversation, but that’s nothing that you’re putting in your material. So I hope that helps a little bit.

Nicholas Donato: We have another question coming in. This person is painting a picture of a challenge that the firm is going through. I’m going to paraphrase here. Their performance is great, they grew several folds, but they’re having a tough year and their asset base is shrinking. How can they stem that decline?

Amanda Tepper: Right, so that’s an example of what I just mentioned a minute ago. If you take in the money that comes in over-the-transom when you’re a top performer, you’re doing it at your own peril. So, that’s best case, at that point, you’ve already got a really compelling story. You understand who your target investor should be, and you’re doing a great job and taking a lot of time and care explaining to every new investor who hires you right then, “Here’s the role we play in your portfolio, here are the scenarios when we’re going to do well, here’s where we’re not going to do well, etcetera.” If you haven’t done any of that and you took the money in, and even when you do do that, that fast money is always going to go the minute you hit a hiccup. So the best you can do, ideally, if you’ve at least laid the groundwork for yourself is to go back and remind them of what you told them when they hired you two or three years ago, and remind them that this is the period where you do something other than top quintile. But when the scenario changes you’re going to come back, and you’re sticking to your knitting, and you’re doing what they hired you to do.

Nicholas Donato: Amanda, we have someone who is essentially saying that they have a hard time getting access to consultants. Do you have any advice for him?

Amanda Tepper: Yeah, we got some interesting feedback there from some peer research that we did on consultants. A bunch of asset managers told us that what’s worked really well for them, is you basically do an end run around the consultant. You get some kind of a relationship going with an allocator, a plan sponsor. And then you get that plan sponsor to tell their consultant to take a meeting with you. The consultant is being paid by that plan sponsor, they will almost always say yes. So, that’s probably the best way for an asset manager who is not coming in through the front door, you go into the side door that way.

Nicholas Donato: Another question here. Again, I’m paraphrasing. This person has had mixed success with third party marketers. They just lost a sales person who came in with a great Rolodex but did not deliver, what do you recommend?

Amanda Tepper: Well, that’s not a third party marketer. It’s kind of similar to that first question, Nick, and that’s where there’s the database that you’ll have in your CRM, but then it’s doing the research to figure out what part of that database makes the most sense to you, and focusing on that and focusing your marketing efforts on that. So, third party marketers, we work with a lot of them at our clients and they can be terrific. But what they tend to bring mainly is, as this person’s saying, is their Rolodex. So what they’ve got is their set of relationships. And if their set of relationships is not with the subset of the market that is the best target market for your company or your product, it won’t work.

Nicholas Donato: We have time for one final question. Someone is asking, “How can fees not be a primary importance because we’re flooded with requests for more detail of our expenses, and I’m spending a lot of time on this?”. What’s your response?

Amanda Tepper: So, that sounds like you’re flooded with requests from existing clients, and definitely there is a pressure to have more and more transparency. Two points there: One is fees are not a primary importance when they are making the decision to hire. When it’s between you and somebody else, if there’s a slight difference in fees, what they’re telling us is that’s not a top three factor in their decision, at any point along the way. Once they’ve hired you, however, and that’s the point we made earlier, it’s really up to the asset manager to keep talking about fees, and reminding them of the all-in value that you are giving them for their fees. So they shouldn’t have to be asking for transparency, to me that’s a message that you need to come up with some type of report that’s going to everyone that is more transparent. But what we strongly recommend is that alongside your fee report would be an annual audit of everything you’ve done for that client, not just your performance.

The number one reason they’re hiring you, frankly, is not a stream of returns with commensurate risks. They want an all-in relationship with you. They want you to make them smarter. They want to feel that you’re a partner with them, so treat them that way. Show them “Here’s the return, here’s the fees, here’s the 25 other things we did for you over the last 12 months, and we’re looking forward to continuing to build our relationship. What else can we be doing for you?”

Nicholas Donato: That’s a good point. I think few would argue that the asset management industry and the private funds industry has entered into this era of transparency.

So, that just about does it for time here. A big thanks to Amanda Tepper and Brandon Gersch for sharing with us some really fascinating research on the LP community. As mentioned at the start of the webinar, a recording of today’s broadcast, including the slides, will be emailed to you in the coming days. If you’d like to learn more about Navatar Private Equity and how we can help you with relationship management and deal management or to learn more about AM 20/20, a research group with a lot of interesting information on LPs, please reach out. Also, reach out, because I know there was a few questions that we were not able to get to, so by all means, email us. You can see our contact details on that final slide there. So on behalf of Navatar, I’m Nick Donato, enjoy the rest of your day.