During my tenure conducting operational due diligence on more than 150 alternative investment sponsors — some of whom succeeded and ultimately helped meet the needs of broker/dealers, RIAs and their clients in the private wealth space — there were certain best practices that repeated themselves and proved the dividing line between the true professionals and those without staying power.
The salient question in this regard is: What differentiates a successful alternative investment sponsor from an unsuccessful one? Based on my own experience and those of my partners, there are five distinguishing features of a strong alternative investment sponsor:
FINANCIAL STRENGTH AND COMMITMENT
Companies need access to a considerable amount of capital resources and the patience necessary to build a reputation within the industry. Emerging sponsors usually underestimate the costs and time commitment necessary as broker/dealers and RIAs typically take an initial wait-and-see stance to new entrants. Commitment and realistic expectations at the outset are critical.
INVESTOR FOCUS
Most sponsors recognize they win when their clients win. This means going above and beyond for investors in a lot of ways, from regular, transparent communications, to a fee structure that puts investors first and aligns their interests with those of the management. Whether a sponsor has an investor focus or not is illuminated when a deal goes south. Some of the best sponsors are those that have had problems but have been upfront with their investors and dealt proactively with them.
MANAGEMENT EXPERIENCE
A strong management team with significant experience in its targeted investment strategy or asset class is imperative. Additionally, seasoned leadership that has extensive industry relationships holds an edge in terms of sourcing and negotiating opportunities.
MEANINGFUL TRACK RECORD
Has management’s prior investment programs met its stated objectives? Has management previously done what it promised? Has the management team adhered to stated investment parameters and guidelines? Or has it drifted from its core competency and expertise? Firms with a straightforward presentation of relevant prior performance give investors a true sense of management’s ability.
COMPANY CULTURE
Firms that outperform realize being an outstanding corporate citizen raises the profile of the entire industry. This goes beyond a good values statement. Companies with a positive culture: 1) attract and retain talented and productive employees, 2) have leadership that exhibits strong ethics and humility, 3) enjoy management stability.
Another attribute of successful sponsors worth mentioning is having established and reputable industry partners, such as law firms, fund administrators and managing broker/dealers. Also important is a sponsor that adheres to documented internal controls and procedures in terms of accounting, financial reporting and cyber security.
This list could go on.
True, sometimes luck or good market timing can also play a role in a sponsor’s success. However, I would encourage emerging managers to consider the above as they embark on the path toward becoming a sponsor of investment offerings in the independent broker/dealer and RIA space — if they want to experience lasting success in the space.
Kemp Hanley is CFO at FactRight.