Raising capital – how can US asset managers overcome industry challenges?
In an ever-shifting fundraising environment, alternative asset managers must now employ a variety of new strategies if they are to be successful in raising fresh capital. But where exactly should US asset managers begin when it comes to navigating this complex landscape and what should they consider?
Over recent years, US asset managers have been forced to operate within an environment that has made raising capital a daunting prospect. Since 2022, high inflation and elevated interest rates have led to poor performance figures for some asset classes. Yields on US Treasuries are now hovering between 4% and 5%. This is the risk-free rate of return with which asset managers now compete. So in this article, we look at approaches and trends to consider when looking to raise fresh capital in this complex arena.
1. High net-worth individuals
Most recently, private equity, venture capital, private debt, infrastructure and other alternative asset managers are all focusing on raising new capital from high net-worth retail investors. They are designing new products, partnering with wealth management firms and accessing the new retail focused platforms that have emerged. According to a recent report from Bain & Company, retail investors account for over half of all investment assets under management (AUM) globally, but only 16% of alternative investment AUM.
“One of the most pronounced trends that we've been seeing over the course of the last 18 to 24 months in private fund asset raising is managers moving from institutional to retail,” says Daniel Max, Head of Global Solutions at TMF Group. “They are doing this in a multifaceted way, whether it's targeting the new alternative investment platforms such as Moonfare or iCapital, or going directly to wealth management firms and investment advisers such as Morgan Stanley or UBS. It is clearly an enormous trend."
But selling fund products to retail and individual investors can come with added complexity. From an operations perspective, there will be many more individual investors in a fund than there would be institutions. This creates a heavy investor relations burden and will require new distribution and communications capabilities. There are also regulations around how these funds can be marketed that can be different from those surrounding institutional fund marketing. There may also need to be different fund structures with different fee and liquidity provisions, all of which need to be fully addressed prior to launch.
2. Expanding to new geographies
Overseas investors – both institutional and retail – are an attractive source of new capital for US asset managers. But accessing these investors and allocators requires both guidance and support.
In Europe, for instance, the Alternative Investment Fund Managers Directive (AIFMD), has been in force in the EU since 2013. AIFMD has four pillars: i) disclosure around business conduct in areas such as risk management, remuneration and conflicts of interest; ii) capital requirements; iii) marketing practices and restrictions; and iv) investment safeguards through depositories and custodians.
With an established administrator, managers can outsource much of the operational lift and focus on investing
With an established administrator, managers can outsource much of the operational lift and focus on investing. “A medium-sized, US-based manager, with $2 billion to $7 billion under management, will have a lot to learn about how to navigate AIFMD and what they can and can't do with respect to issues such as marketing their fund," says Max. "It is important to have a roadmap and get assistance in order to get traction in the EU."
Similar but different regimes exist in other jurisdictions, such as the UK, Japan, Australia and the countries of the Middle East. These are all attractive markets, with investors keen to invest in US funds.
3. Launching new asset classes
Launching new products in new asset classes can be a compelling way for managers to grow and diversify their future revenue. From an operations perspective this presents challenges, not least around reporting schedules, valuations, liquidity expectations and other technical issues. Engaging with a third-party service provider in this instance can deliver significant operational efficiencies.
"If a firm is looking to move from private equity and launch a credit product, for instance, but their existing equity operations teams are less familiar with credit, there is little point in trying to reinvent a wheel that has already been successfully deployed over and over again," says Max.
With PwC and others forecasting a doubling of allocations into the alternatives space in just under ten years, (between 2018 and 2027) the opportunity is clear. Those who can best capture this fresh capital will be those with agile and efficient operations that are able to swiftly seize the moment.
This article is based on information found in TMF Group’s ‘Growth Playbook for US fund managers’, a new report that offers exclusive insights into strategies that can help transform your business. For further information on raising fresh capital, download the full report today.
