Q&A: Hedge Fund Allocator at a $2B+ E&F

Hi there, After lurking for sometime, I figured I'd jump in with a Q&A: Anything you want to ask an E&F allocator? Willing to offer candid thoughts on any and all questions, from the do’s and don’ts of getting funded to what life/comp is like on this side of the table. I have 10+ years in the industry, touching every asset class from global equities to private E&P to drug royalties to macro funds. (And bonds too, but bonds are boring.) After hundreds of GP meetings, there are a number of factors that separate those who get funded from those who don’t.... ask away!


 

Great question and one we get from new and emerging managers fairly frequently. My office doesn't have a specified requirement, and have seeded new managers and participated in first day launches in the past. The key is to show your strategy is clearly differentiated vs. other peer funds when it comes to performance. Additionally, institutional funds typically can't/don't want to be more than 20% of your AUM.

The 'standard' is typically 3 year track record, with top quartile versus peer funds over that same time period. But a strong relationship/network/warm introduction is the most efficient way to get on allocators' radar. For a $1B+ endowment, you'll need around $100M or so in AUM. If you're less, target family offices to build your base AUM, then start talking to E&F, etc.

 

How smart are these guys you meet?

What are they're backgrounds often like?

Any with unique backgrounds?

Which style do you feel comfortable investing in these days?

Any GP's ever get so desperate they offer you things?

Thanks, there's more to come.

Absolute truths don't exist... celebrated opinions do.
 

What's your experience with placement agents representing GP's and introducing their fund/investment strategy to you and other LP's? I'm talking about placement agents that deal with all sorts of alternative funds from HF to PE to real estate to private credit and even real assets. As someone with lesser pedigree but an interest in sales/relationship management and private markets, I'm super interested in the placement agent business.

We're not lawyers. We're investment bankers. We didn't go to Harvard. We Went to Wharton!
 

My experience with placement agents has been positive overall, but my answer is more nuanced.

From what I’ve seen, super agents carefully curate their network, offer candid information to both sides, and most understand our side of the business and don’t get upset if a meeting doesn’t lead to a giant windfall. In terms of visibility for a new fund, using one is one of the quicker ways to become a known entity/brand to allocators.

Placement agents are a great bridge, and there are 2-3 who I will always take their meetings; however, it does not necessarily improve a PM’s chances of growing AUM. We have multiple sourcing ‘pipelines’, as is the case with many allocators, and placement agent-sourced managers generally have a lower batting average in terms of making it into my portfolio. (Though, I can’t speak for others, naturally.)

If you want to break in, consider working at cap intro/prime brokerage for a few years to build a solid network. If you already have one, tailor your message to what each allocator is focused on, don't just inundate my inbox with everyone you represent.

(Also, feel free to PM.)

 

Theres two sides to placement agents: the project management/campaign management team which looks for promising GP's and turns down less promising GP's that want their services, prepares them to hit the road and meet with interested LP's etc. At the junior level (Lazard/CS/UBS private fund groups) its like investment banking without the financial modeling, lots of very important memos etc.

Then there is the distribution/marketers side of the business who are the ones traveling extensively and meeting with LP's to see what their alternative's allowance is, and how their funds can fit into the LP's fund. This distribution side of the business is what I want to do, although the seniority for these roles is minimum senior VP/director age range. I am trying to see how to best position myself to be a distribution banker, and wanted to know when you meet with these guys what their backgrounds look like/what should I be doing to get here in 6 years or so?

transition into institutional sales at a large AM, private banking, FoF marketing?

Also, the general pay scheme in the industry is that the placement agent gets 2% commission from the fund raised. $1 billion fund= $20 million in revenue for a high margin and low capital expenditure type of advisory service, this is why the best and most profitable agents are boutiques (Evercore, PJT, lazard, mvision, etc.). Do the agents you meet with strike you as extremely polished, clean cut, expensive suit, and wealthy type of guys?

thanks for the comments/help Hitmybid @neil91"

We're not lawyers. We're investment bankers. We didn't go to Harvard. We Went to Wharton!
 
Best Response

I'll chime in as I have a fair bit of experience around placement agents. Its not entirely correct to say that there are two sides to the business: one being project management and the other being distribution. Like any professional services job, your experience changes and becomes more oriented to relationship management as you move up the totem pole. So even if you wanted, there's no way Lazard or UBS will send a 22 year old with a 2 year IB stint to an institutional LP to discuss asset allocation and potential primary funds / secondary transactions. As you mentioned, that part comes later when you move up to the VP / Director stage. At the lower levels, as an Analyst or Associate, you are responsible for primarily working with the GP to put out a focused marketing message - this involves working heavily with the GP on things like their marketing deck, advice on fund terms, how to spin failed deals etc.

At the senior levels, most individuals I see come from an investment banking background or from an institutional sales desk at a major bank. This makes sense because these guys usually have an impressive rolodex that can leverage. At the junior levels, its really a mixed bag. I have seen people with backgrounds in IB, S&T, audit, commercial banking etc.

Your idea on general pay scheme is mostly correct but is more nuanced than that. Remember that a placement agent gets paid only on allocations they bring to the fund. On a $1 billion fund, a good placement agent might bring it, at the top end, ~50% of the capital. The remaining usually comes from the GP's fundraising process. After travel, entertainment and other expenses, the numbers are not as lucrative as you mention (although it still remains a good business). Also keep in mind that the best quality GPs whose funds end up being oversubscribed will never use placement agents (they don't have to). Agents are used when a GP needs help fundraising - so generally speaking, it is a tough job drumming up interest for these funds.

To answer your last question, no, the agents I meet do not happen to look like modern day Patrick Batemans. They are usually jetlagged, slightly out of shape white guys in their 40s and 50s.

 

Have a lot of questions so thank you in advance for doing this.... tried to throw you as many bananas as I could

1) how do you generally think about how HF's fit into your allocation structure? Is this different from other types of LP's? How will this change going forward?

2) when you are seeding a liquid alts manager (L/S equities specifically): what due diligence do you do on them? please provide as much detail ranging from the mundane (GPA) to the hardcore (hiring a private investigator)

2) For liquid alts - do you grade them in terms of returns or sharpe-ratio maximization?

3) where do you think the real money in hedge funds will be in the future? (asset classes, strategies, multi-manager vs single manager shops)

4) what are the factors you mentioned that separate those who get funded from those who don't?

5) what is an example of someone's "strategy being clearly differentiated"? It seems like that is a bit difficult in equities as there are so many players

6) how do managers get onto your radar? Are they referred from other LP's? Friends in the industry? media? do you ever have PM's at multimanager shops start networking with you in advance?

Again - really appreciate you taking the time to answer this stuff

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