In short: After an emerging manager leaves the room, an allocator forms a view on five things, and performance is not one of them. Whether the business and the portfolio have been separated. Whether the manager came to market before the structure was resolved. Whether the launch timeline is realistic. Whether there is a runway plan on paper. And whether the investment process can be explained simply. Performance is assumed, because it is what got the meeting. What decides the second meeting is the predictability of everything around the return.

I was talking to Kieran in a podcast studio, and he asked me a question:

What does an allocator pick up about a manager after that manager has walked out of the room.

It is a fair question but I struggled to give it a single answer. So I gave five, in no order of importance, in the order they arrived.

When I finished, he pointed out that I had not mentioned performance once.

He was right.

1. You are running the portfolio and the company, and you have not admitted it

A clear separation between running the business and running the investment portfolio. Call it the CIO and CEO divide.

I see people who want to do both and who have not realised how much is involved in the day to day running of the business. They have not got a strong enough partner beside them to go on this with.

This comes up in allocator conversations more than any other thing on this list. Especially when I call the allocator to get specific feedback in the aftermath.

I wrote about this one on its own a few weeks ago, in the second job you didn’t sign up for. It is also the mistake that quietly closes funds that were never in trouble on the trading side.

2. You came to market too early

This is about the business side, and whether you have thought the structure through. It has little to do with the length of your track record.

A few examples:

• You do not yet know what your regulatory framework is going to be. What licences you need.
• Whether you are going to have a fund or manage accounts.
• Where you are based and what that means for both.

Where you are based and which vehicles you are going to offer belong in an investment conversation.

If those are unresolved, you are asking someone to have a conversation you are not in a position to have yet, and the allocator does not know if you fit within their guidelines or structure.

3. Your timeline is naive

New managers ask about timelines constantly.

What is the timeline. When can you launch.

Take someone trading OTC markets who is going to need ISDAs and who believes they will be up and running in three months.

Good luck negotiating ISDAs in three months. It could take six. It could take a year.

Even negotiating IMAs can be lengthy, and that’s why some large institutional investors send you a draft contract for you to eyeball any potential issues before it goes to Investment Committee.

There are several parts of the business where managers are naive, and this is one of the loudest, because the timeline is the first thing you say out loud and the first thing that gets checked against reality.

4. You have no runway plan on paper

I say this constantly and I am going to keep saying it.

How long until you break even. Break even on the fixed fee alone, not on performance fees. What is your plan to survive that period. If you have not run that number, start with what breakeven AUM actually looks like.

Then what is your plan to grow past it:

• Who do you hire.
• What does the business look like at 50 million, at 100, at 250, at 500.

Life happens and plans change. Yet, it’s a good strategy to walk into a first investor meeting with that framework already on paper. And you can always ask investors what they think of your plan. You might pick up something useful.

5. You cannot explain the process in simple terms

I mean the machine that produces the decisions.

What is the order of things, and what happens when. What are the decision trees. Who does what.

The process can be enormously complicated and still be explainable in a sentence. Your ability to explain it is separate from how complicated it is.

Who does what is one of the important elements of a process, and answering it takes you straight back to the first item on this list.

• Where does the buck stop?
• Who has oversight over whom.
• Where do the responsibilities lie for each part of the business.
• If there’s disagreement, who decides?

I’d like to add an additional layer here, which people often forget. What you say in the meeting, how you say it, the body language you use, and the way you and your colleagues interact if you bring them with you. Does that nuance translate into the same message you’ve put on paper?

Why performance was not on the list

There is a reason I did not mention it.

First, every manager who walks through the door believes they have fantastic performance, and the devil is always in the detail. What allocators actually do with the gap between a claim and a record is a subject of its own.

Second, since you got the meeting, I’m assuming the performance was there and not a red flag for the investor to start with.

The question Kieran was asking is what happens after that meeting, and what you got wrong in it.

But I want to turn the question around, because the interesting version of it is not about you.

If the only reason an investor gives money to a manager is performance, what happens to that investment the month the manager has bad performance?

Chase performance alone and the investment stays exactly as long as the performance does. Nobody has performance all the time, through all the cycles. There are always periods of underperformance.

So the performance question that actually matters is whether an allocator understands fully when you are supposed to perform and when you are not, and whether they can explain that to their committees. The expectation they have built of you has to be what you actually do.

That is what you are being assessed on. The predictability of your behaviour around the return and business operations (and if you’ll allow me, the interpersonal side of things, how easy will you be to deal with, or how big of a pain in the neck).

Which is why how someone deals with a drawdown says a great deal about them as a person, and about the firm as a firm.

I had a well known London investor years ago whose first question was always whether the manager had ever had a big drawdown and recovered. He loved that. His reasoning was that if you have lost someone else’s money, you have learned a lesson, and you did not do it with his money. So he would always ask: “Tell me about it. What did you learn?”

It is the right question. You lost money. Why. Were you expected to lose money there, or did you lose it in a way you were not expecting. How did you address it. What changed.

It might be that what changed is nothing about the exposure. You are still expected to lose money if that situation repeats. But how you react to it is different. You may decide to manage the risk differently, so the total output is slightly different even though it is still a loss.

“We have never had a down month” is not exactly the answer the investor is looking for on this one.

All of which sits alongside a separate question worth asking yourself before you take the meeting at all, which is whether the person across the table can actually back you.

The caveat

I am not an investor. I have never written a cheque for an investment in my life.

I would still rather say that out loud than pretend otherwise.

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That conversation ran an hour and a half. We also got to trust, fee structures, what actually happens inside a due diligence process and so many other topics.

Watch the full conversation on Fly on the Fund Wall.

Go and listen to it.

And please do not be pissed off with me if you love light blue shirts and navy Patagonia gilets.

Cláudia

Frequently asked questions

What do allocators judge an emerging manager on after the meeting?

Five things, none of them performance. Whether the business and the portfolio are run by different people. Whether the manager came to market before the structure was resolved. Whether the launch timeline is realistic. Whether there is a runway plan written down. And whether the investment process can be explained in simple terms.

Why is performance not on the list?

Because it is what got you the meeting. Every manager who walks through the door believes they have fantastic performance, and if you were invited in, the numbers were presumably not a red flag. The deeper reason is that if performance is the only thing holding an allocation, the allocation lasts exactly as long as the performance does. Nobody performs through every cycle. What matters is whether an allocator understands when you are supposed to perform and when you are not, and whether they can explain that to their committees.

What does it mean to come to market too early?

It has little to do with the length of the track record. It means the business is unresolved: the regulatory framework and licences are undecided, it is not settled whether there will be a fund or managed accounts, and the domicile question is still open. If those are unanswered, the allocator cannot tell whether the manager fits their guidelines or structure, so the conversation cannot go anywhere.

What should an emerging manager’s runway plan contain?

How long until break even on the fixed management fee alone, not on performance fees. The plan for surviving that period. Then the growth side: who gets hired, and what the business looks like at 50 million, at 100, at 250, at 500. Walk into a first investor meeting with that framework on paper, and ask investors what they make of it.

How should a manager talk about a drawdown?

As something they learned from. One London allocator opened every meeting by asking whether the manager had ever had a big drawdown and recovered, on the reasoning that a manager who has lost someone else’s money has learned a lesson and did not learn it with his. The question behind it is what changed: whether the loss was expected in that situation, how it was addressed, and what is different now. “We have never had a down month” is not the answer being looked for.

Why does explaining the process simply matter so much?

Because the ability to explain a process is separate from how complicated the process is. It can be enormously complicated and still be explainable in a sentence. What is being tested is the order of things, what happens when, what the decision trees are, and who does what, which leads straight back to whether the business and the portfolio have been separated at all.

Key takeaways

• An allocator’s view forms after the meeting, and performance is assumed rather than assessed. It is what bought the meeting, not what wins the allocation.
• Running the portfolio and running the company are different jobs. This comes up in allocator feedback more than anything else on the list.
• Coming to market before the regulatory framework, the vehicle and the domicile are settled makes the conversation impossible, whatever the track record says.
• A runway plan belongs on paper before the first meeting: break even on the fixed fee, survival through that period, then hiring and shape at each AUM level.
• What is really being assessed is predictability. An allocator has to be able to explain to a committee when you are expected to perform, and when you are not.

This publication is provided for educational and informational purposes only. The views and opinions expressed are those of the author and do not necessarily reflect those of any third party.

Nothing contained in this publication constitutes investment, legal, tax or other professional advice, nor should it be relied upon as such. Nothing in this publication constitutes an offer, invitation, recommendation or solicitation to buy or sell any security, fund or other financial instrument, or to engage in any investment activity.