Partnering with another asset management firm
Rather than starting from scratch, the neo-manager has an interest in finding an experienced partner who can save him time.
Raising a first fund is notoriously difficult for a manager who lacks both a loyal investor community and a track record to attract new ones. To ease this challenge, a manager can seek support from a more experienced asset management firm.
Partnering with such a firm can provide invaluable benefits: access to its investor network, shared management tools, guidance on regulatory obligations, insights into best practices, and referrals to seasoned advisors. This strategic alliance can compensate for the shortcomings of a new manager. However, the manager must consider what they can offer in return to cement the partnership.
The asset management firm must be persuaded before committing its time and resources to a partnership. Introducing investors to a new manager involves risks, such as capital being directed towards assets managed by someone else. Employees may also be unwilling or unable to dedicate their attention to an external party's operations, and regulatory liabilities must be worth the potential rewards.
In an ideal scenario, the new manager will demonstrate their ability to generate a stable and appealing revenue stream. Unfortunately, proving this is challenging, as new managers are often small-scale compared to established ones. Unless a "blue-sky" financial outlook is present, their proposition may not be enticing to a large firm. If immediate financial gain is off the table, the new manager's strategy must promise broader benefits for the firm's portfolio companies or the firm itself.
A compelling case can be made if the new manager’s approach offers a fresh, complementary strategy for the established firm. This synergy brings a new dimension to the firm's operations without competing with existing assets. A management firm would have no incentive to entertain a proposal that risks cannibalizing its current portfolio.
Few asset management firms are active across all verticals; only the largest players can claim strategies encompassing every asset class. Even then, they often steer clear of sectors they deem unprofitable, overly risky, or too niche.
Developing a new focus area
Most asset management firms are eager to expand into untapped verticals. The more established they are, the more inclined they may be to explore new sectors. However, hiring in-house expertise can be challenging, as these firms often lack the necessary skills internally. Additionally, external growth through acquisitions can be complicated by regulatory hurdles. Partnerships, therefore, present an ideal growth pathway for such firms.
Managers specializing in high-demand areas like impact investing or green finance are likely to find open doors, as many firms aim to showcase these verticals in response to investor demand. Real estate is another attractive sector, offering specialized expertise and potentially strong synergies with commercial operations.
Both parties will need to agree on the legal and financial terms of their collaboration: how carried interest and management fees are shared, responsibility for operational costs, and long-term incentive structures. Discussions will also revolve around the start-up manager's growth plan and potential for long-term alignment of interests.