The New Building Blocks: A Changing Model For Successful Private Funds

Oct 5 2010 | 1:13pm ET

By Jayesh Punater, Gravitas --  Despite some prophesies to the contrary, a great many resilient private funds survived a brutal industry downturn. Now these survivors and new market entrants face three key challenges: first, a volatile market, second, a more demanding client base and third, an increasingly challenging regulatory environment.  Looking in the rear-view mirror is no longer the way to see what’s coming, because the industry has changed so rapidly, and what worked in the past may not work in the future.

Think about the way things were just a few years ago.  There was less regulatory pressure.  There was an “only what’s necessary” focus on clients and marketing as performance spoke for itself.  Little emphasis was placed on enterprise risk management.   Ownership was concentrated around the founding portfolio manager. Succession planning was not giving much thought. A set fee model—2 and 20—ruled the industry. Managed accounts did not exist.  Now all of this has changed.

Gravitas sees four essential “building blocks” defining the private funds industry going forward: leadership and governance, technology, culture, and marketing and investor servicing. When these characteristics are added together, they equal true innovation.  Looking ahead, innovation is going to be key in how private firms differentiate themselves and deliver superior results. 

Let’s look at these building blocks in more depth, and what makes them cornerstones of this changing model for success for private funds.

Leadership (& Governance)

Investors need to know that a strong leader and management team are in place at a firm. It is no longer acceptable to just have a strong founder/owner with an impeccable reputation and track record; he or she must stand on top of a well-organized, highly-competent leadership team handling various areas of the business.

From a management and organizational standpoint, there are strong parallels between private funds and professional services firms. They both operate people-intensive and knowledge-intensive businesses that require capable leaders at the top. A well-trained management team is absolutely critical in creating proper alignment between a firm’s strategy (investment as well as business), culture, organizational structure and business operations.  Issues around succession planning and continuity of the franchise are becoming important aspects of the leaders concerns at many of the largest firms. 

Further, leadership at the most progressive private funds will evolve to embrace the formation of well structured and staffed boards of directors and/or boards of advisors that are common today in successful professional services firms and other businesses.  Extending beyond the board structures common in many of today’s offshore fund entities, establishing such governance boards with true substance and real mandates can provide leading firms with a great source of experienced counsel and input that can prove most valuable in a firm’s continued growth and development.

Technology (and Operations)

Technology has long been a core competitive advantage for many of America’s greatest corporate innovators, GE, Microsoft, Caterpillar, 3M, Apple and DuPont.  While technology-driven competitive advantage is not as pronounced in the private funds marketplace, funds are in fact changing their approach to technology in two important ways:

  1.  Creating operational efficiencies and optimizing processes – The best firms have systems in place that effectively mitigate operational risks and serve as an integral part of flexible and scalable operating platforms. Achieving a well thought out balance of internally resourced and outsourced operational support infrastructure will enable firms to achieve the most cost effective operating platforms and will allow the fund’s operations professionals to focus on tasks that add value.   

2.  Enabling investment management and business management functions – Technology used to be thought of as more of a high frequency trading fund’s game. But now the vast majority of leading funds are looking to technology to deliver more to their clients, regulators and investors and to do so with less capital expenditure. Today, firms investing across virtually all strategies are increasingly using technology as a leverage point for achieving enhanced investment management process. They are creating systemic, scalable processes to identify and exploit investment opportunities. In a time when the markets are volatile and the opportunities for outperformance more limited, the advantages offered by technology are crucial.

Culture

Culture has the potential to be a huge differentiator when funds are looking to win new mandates and build successful, long term franchises. Too often, however, this particular value element is ignored when private funds assemble teams.

A strong culture of shared values and working behaviors can only be achieved when all employees truly understand and live by the basic values espoused and demonstrated by the firm’s leadership.  Over time, and often through trial and error, a firm’s culture should become tightly aligned to the strategy and business of the firm. A strong culture keeps the best talent in house during good and bad times, helps recruit new talent, and identifies individuals who do not fit. The result is a stronger, more cohesive organization that is more prepared to tackle the investment and business challenges of the day.

Marketing (& Investor Servicing)

While Corporate America values and respects investor relations and marketing as a core business function, private funds have traditionally underinvested in this area. The importance of high quality investor relations and marketing is more apparent now that funds are forced to look beyond performance to differentiate themselves and attract new investors.

Many of the earliest, and now most successful, firms understand the importance of developing close relationships with their clients. They long ago adopted a disciplined process for client outreach and investor communications.  The days of performance speaking for itself are over and the scope and nature of a fund’s transparency across a number of dimensions has now become a significant differentiating characteristic of leading funds and an imperative in the minds of virtually all investors.

Marketing is also a top priority for firms looking to attract capital from different investor classes and geographies. Even with the turbulence of the past two years, private funds remain an attractive option to institutional investors as their performance as a sector continues to beat “traditional” investment classes. But this money won’t come easily. Investors, burned in 2008, are now placing more demands than ever on funds in the due diligence process. Firms need excellent investor relations and marketing programs to satisfy investor needs and raise meaningful amounts of capital.

Summary

Leadership and governance, technology, culture, and marketing and investor servicing—none of these terms is new in the private fund industry.  What has changed is that these four building blocks have become an integral part of the foundation of successful companies.  These are the foundation elements that equate to innovation and focusing on them will help build the next generation of industry leaders.

Jayesh Punater founded Gravitas in 1996 and currently focuses on Gravitas' growth strategy and manages overall operations with the management team. Prior to founding Gravitas, Jayesh held management positions in various technology consulting and manufacturing companies, including New York- based system integrator DNA, and workstations manufacturer 68000 Inc. Jayesh has a B.S. in Electrical Engineering from Arizona State University and has extensive executive training in marketing, finance, and management. He also taught a course on entrepreneurship at Fordham University.


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