The Investment Manager and Investor Disconnect

By: Christopher Manlove

A brief walk through communication in investment meetings

After twenty years of working with alternative investment managers and institutional investors, the number of times that due diligence meetings between the two groups do not go as well as they should still surprises me. When investors commit time to meet with a manager to learn about their firm and strategy, they want to be able to see the two or three things that set the manager apart. To be more straightforward, they want their time to be well spent. The same can be said for alternatives managers, who want to meet with quality institutional investors and come out of each meeting with a clear sense of whether or not their strategy may be of interest to that investor. Unfortunately, more often than you would expect, neither group seems to fully accomplish their respective goals.

Institutional investors need to come away from the discussion with a complete picture of the manager’s opportunity set, resources, knowledge, and edge. In other words, the investor needs to clearly understand the manager’s value proposition. Without a clear picture of the value proposition, the institution does not have the foundation necessary to make an informed decision about the manager or whether they may be a potential fit for their portfolio.

An investment manager should have the exact same objective. The reality in the marketplace is that many managers simply do not know how to execute that explanation effectively or efficiently. Assuming the investor does understand a manager’s value proposition, the investor can provide the manager with a genuine sense of their interest level and, if actually interested, what the appropriate next steps in their due diligence process are. If that understanding is not there, the manager ends up unsure of where things stand, what the appropriate next steps are, or how much time they should devote to the investor in the future. This can be a perilous situation for the manager as they typically only get one chance to impress an investor and with the institution’s time at a premium it may be years (if ever) before they agree to meet with that same manager again. Given the number of managers that investors need to assess, they are often looking for reasons to disqualify a manager early in the evaluation process adding to the importance for managers to effectively convey their message.

Experienced investors are generally quite good at asking probing questions that are designed to help them gain a solid feel for the manager’s strategy. But, if the manager doesn’t fully comprehend why each question is being asked (it may not be obvious) or fails to provide a precise and informative response that gets to the core of what is being asked, the investor is left with little value. When investors leave a meeting without fully grasping a manager’s strategy (regardless of how good their performance or opportunity set is), it is unlikely the two groups will find a way to work together – even if the strategy happens to be a good fit for them.

Ironically, it’s all too common for managers to come out of this type of meeting thinking that the discussion went really well when actually they have left the investor with remaining questions and doubts that lead them to put the manager on their “back burner” or write them off completely.

“We want to watch you for a while before making a decision.”

This is a phrase that managers often hear from prospective investors following what they thought was a good meeting. In some cases, this approach is simply an elegant way out for the investor, but the watch and see mantra can also be prudent for investors looking to become more comfortable with a given manager. With that being said, when an investor responds this way, while actively looking to allocate capital in the area of the manager’s expertise, it is usually because they can’t clearly see how the manager’s strategy can help them meet their specific investment needs.

As seasoned advisors for alternative investment managers working with institutional investors, we spend an enormous amount of time with each hedge fund, private equity, and private real estate manager preparing them to effectively communicate in meetings with potential investors. This can include anything from simple body language and ideas around effectively framing their investment strategy to communicating a particularly complicated portion of their investment process. Our goal is to have investors clearly understand the manager’s value proposition within the first 30 minutes of meeting. We often find that managers are so close to their own strategy that they assume investors will easily understand it too, and as a result can have a difficult time effectively explaining what differentiates their approach. While investors may generally comprehend a given investment strategy, what they really need is a clear understanding of the following:

  1.  The manager’s opportunity set
  2. The manager’s specific investment process
  3. How the approach is different from others in the same space
  4. Why the strategy has been effective historically
  5. Why the strategy should continue to be effective in the future

A manager’s ability to effectively communicate these things, and an investor’s ability to fully understand them, is what leads to action. As silly as it might sound, managers need to spend time effectively honing their pitch. Dry runs in front of a knowledgeable outsider, while incorporating feedback, can do wonders in future meetings. It is important to remember that the best pitch isn’t really a formal pitch at all, it’s an evolving discussion between potential partners.

Managers and investors alike need to focus on what they can do for the other party. Asking a direct question at the beginning of a meeting, stopping an explanation or overview to examine the relevance of the topic to your counterpart, or redirecting questions to fit an already stated, specific need are all things both managers and investors can do to get more bang for their buck. In the end, the burden of proof lies with the manager, and that manager needs to do all they can to ensure they have effectively communicated their value proposition – including placing as much emphasis on investor interactions as they do on their investment strategy.

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