499

Investors still hold an appetite for alternatives, but an asset manager’s investment universe matters more today than ever. Many sectors have been heavily impacted by the global Coronavirus pandemic, which has driven investor sentiment in varying directions based upon their risk appetite. Many investors are bucketing opportunities for allocation into three main areas:

(1) Great buying opportunity  [Read: These investors are looking to move quickly and buy up distressed opportunities, we are talking weeks and in some cases less than 3 or 4 months.]

(2) Needs more information and therefore requires medium or long-term monitoring  [Read: These investors are typically looking to expand their portfolio, but do not have enough history or knowledge in a sector to move quickly enough so at this stage. A fund manager will need to spend a wealth of time educating them in order to get an allocator comfortable to move as well as if possible being considered a leader within their given sector is greatly preferred, if not it will be a great uphill battle.]

(3) The fundamentals in this sector have altered too greatly to make this a good time to buy  [Read: These investors find that the opportunity ventures too far away from their investment approach and risk tolerances to want to go into the market and will very likely advocate for long-term monitoring to see how the asset manager can weather the storm.]

Many allocators fall somewhere within this spectrum and in order to have a successful due diligence, it is paramount for your success to understand where they stand. Liquidity is important during times of market stress, but so is opportunity and the strength of conviction in a particular fund manager will determine who investors allocate to and within which particular investment universe, fund structure and operational capacity they fall within are just a few of the areas that matter greatly to an asset manager looking to attract capital today.

We are seeing several allocators move quickly into opportunities that are currently distressed and that is driving demand. The question right now for a fund manager is, how distressed is your investment universe and how well can your particular team and fund navigate through it in the short-term, medium-term and long-term? Additionally, what is your investment perspective and more importantly what role does that play into their underlying investment thesis, risk tolerances, approach and fiduciary duties. Be prepared to share what your Q1 2020 results were – if you performed poorly have a compelling reason as to why you believe you will be successful moving forward.

So, what does this all mean for asset managers trying to continuing managing or creating new LP relationships? This is where fund managers really need to step up when it comes to how they manage the due diligence process and create demand for their strategy. They need to build an appropriate story that does not hide from our current reality, but further accentuates it. They should also pinpoint the investment opportunity they present within realistic terms that their fund can create and expectations around performance during this time. Every investor is different and as a result your pitch needs to mold itself around your audience and each investor that a fund manager is courting. This guiding principle has never changed, but it needs to be brought to the forefront more than ever. Especially as a fund seeks to get to the top of an investor’s buy list.

Where COVID-19 has also placed a greater spotlight is on a fund’s operational infrastructure. Strong infrastructure is crucial in moving efficiently and accessing the right opportunities. Hence, investors will take a very strong look not just at how you invest and the thesis behind that, but they will also take a very critical eye to your operations that are able to support those efforts. Allocators need to feel secure that your business can not only withstand through the crisis to capture these opportunities, but also have the wherewithal to invest aggressively and capture the alpha desired during these distressed times. As a steward of capital, it is critical to a fund manager’s success to understand the nuances that come with investing during a difficult and volatile market environment coupled with investing in geographies with changing or even tenuous economic policies.

Many investors’ portfolios are being impacted by the crisis and as a result they are seeking new opportunities that can help balance out the investments impacted – both those industries they directly invested into and those indirectly impacted – by COVID-19. Investors are open to new opportunities, but it has to make sense for their investment requirements and the desired investment universe and underlying sectors they want to gain access to. Allocators are actively running correlation analyses to ensure proper portfolio rebalancing and determining how much to leave in cash as they weather through this new normal.

A few of the greatest areas that COVID-19 has brought to life in due diligence is a stronger spotlight on a fund’s operational capabilities, greater assurances against style drift and increased lines of communications between asset managers and their limited partners. However, greater communications requirements signifies a strained bandwidth on the investment teams, but nonetheless, it is a requirement even moreso today. A definitive reason why investor relations will be heavily required to mitigate against that. Strong and active investor communications is no longer a suggestion, but a necessity. Liquid strategies in particular are at a greater redemption risk, if they cannot prove their value to an investor’s underlying portfolio. Allocators have been redeeming and reallocating into other strategies as a way to reposition their portfolio to consider the new reality and the corresponding risks posed.

At this point it has now become clear this is a long-term event and has the potential repercussions to mirror those of the Great Depression. Therefore, navigating around technology requirements as a result of social distancing, building some form of a human experience in interactions in addition to understanding the strength of the investment thesis coupled with airtight operations are how investors are looking at funds.

Due diligence will continue and has by no means paused for the vast majority of allocators. There will be investors who want to ride out the storm, but there will also be many who want to capture opportunity and not hide from it. History has shown us that fortunes have fallen, but also have been created and built on the back of crises so it is not surprising to see that appetite is still healthy. But how due diligence is run will shift and evolve as we weather the storm. The conviction that an investor must have in a fund manager as a result of social distancing has increased.

As a means to build engagement and trust with investors where possible video calls are highly encouraged. Why? This is because body language matters and it highlights your confidence in the subject matter thus further bridging the gap of the human experience desired in due diligence. Your presentational abilities are all a part of manager due diligence and visualization is key.

The sentiment is that investors are generally open, but the barrier to entry in capturing that attention and building that trust is higher than ever. An asset manager must account for this in their marketing strategy in connecting and building investor relationships. Additionally, how you look at investor relations and operations are key guiding principles during the Coronavirus pandemic. Today, it is once again about investment in a quality operational infrastructure, strong lines of communication and an investment thesis that addresses the new reality head on. Those fund managers that are thinking about that are the ones who are going to realize the most success as they navigate through the global Coronavirus pandemic.