The power of accessing hedge fund managers in their early years is undeniable, as is the reality that meeting face-to-face with potential allocators is not likely to happen again until next year.
The issue of virtual due diligence on managers that have yet to get on many large institutions’ radar is being faced by capital introduction groups and third-party marketers alike.
According to Agecroft Partners’ Don Steinbrugge, this summer has been a busy one for investors and managers alike. Much of it is thanks to the industry embracing Zoom beginning in June. Investors’ interest in private markets did not let up even while allocations seemed to slow down over the last three months.
In the newish Zoom era, due diligence is being done through one-on-one video calls and via virtual cap intro events. Steinbrugge’s firm is hosting on September 10 an educational event on how institutional investors can make the most of emerging manager allocations.
Preliminary results from a soon-to-be-released Agecroft survey of large institutional investors found that 65% are willing to commit to a manager with less than $100 million. A total of 40% said they would consider a newly launched fund.
Interestingly, Steinbrugge pointed out, that only 5% said that they require that managers have $1 billion or more in assets. That figure would have likely been 20% or more only a few years ago, he said.
“Virtual capital introduction for managers is vital,” said Steinbrugge, adding that they are often very inexpensive to attend but the return on investment is “very high.”
One industry provider, Hedge Connection, saw early adopters move to online cap intro in back in the spring already with little slow-down in the meantime. Virtual due diligence has been another thing entirely with many eyeing new ways of completing operational due diligence via video conferencing.
Pershing Prime Services Mark Aldoroty said investor’s comfort level with virtual meetings is increasing. While embracing of virtual video conferences still varies widely, the market overall has warmed up to the idea. Those in the private wealth space more quickly embraced online meetings and got comfortable with the virtual-only dynamic of due diligence.
“Large institutional investors that have strict, long-standing policies requiring onsite operational due diligence visits remain particularly challenged in making headway with new manager relationships,” said Aldoroty. “Since the virus outbreak and ensuing lockdowns, these groups focused heavily on those managers in their pipeline with whom they already met.”
He suspects that as time goes on and social distancing continues, it will be interesting to see how investors adjust their approach as their deal pipeline becomes gradually depleted of pre-existing opportunities.
When it comes to investment due diligence, he said that little has changed. Investors are still evaluating managers based on their portfolio exposures, how those exposures are managed over time and a manager’s ability to maintain their edge as the market evolves. And, of course, consistency in returns generated and strategy approach and application through the market volatility continues to be in focus.
The question remains though of when investors’ existing pipeline is depleted and when all will depend on ‘virtual’ events and calls to not only source new talent, but also do investment and operational due diligence exclusively over Zoom calls.
“There isn’t a one-size fits all answer to this question,” said Aldoroty. “It depends on how many managers investors keep active vs. inactive, do investors go back and look at managers they may have reviewed in the past, what’s the inflow rate, etc.”
While allocations slowed over the summer, Steinbrugge said that he suspects there is still very much pent-up demand as we are only six months into the new era of doing business due to COVID-19.
As with all things pandemic the move to online vetting is still very much a work in progress, according to experts. Either way it is increasing as Agecroft Partners moves its long-standing industry in-person events to online.
His advice to managers is to participate in multiple events across different capital introduction networks. It is not only a brand-building exercise, but a way to broaden market coverage.