During my tenure at FactRight, we have conducted operational due diligence on more than 150 alternative investment sponsors. Some have been very large, some very small, and many in between. I consider myself very fortunate because I enjoy the work. I enjoy getting to know the people, learning about their experience, about their investment process and how they envision growing their business. Some of the due diligence process is inevitably tedious, and to a certain degree repetitive, but ultimately no two companies are alike and that is what makes it always interesting.
For sponsors that are new to this space, it can be very challenging to gain traction. For the sake of our industry, I would like all the new companies we conduct due diligence on to be successful, but that is not always the case. Admittedly, it is gratifying to me to witness the development and ultimate success of the ones who make it, those who came into the industry with an objective and successfully executed on their business plan. After all, these sponsors help meet the needs of our broker dealer and RIA clients, and their clients, and elevate the industry. The question that comes to mind is—what differentiates a successful sponsor from an unsuccessful one in the alternative investment space that we participate in?
I posed this question to the FactRight brain trust and was somewhat surprised by the remarkably similar answers I received. While the responses varied in wording, and I noticed a very slight bias depending on area of focus and expertise within FactRight, some important common threads appeared. Based on our internal survey, here are the top 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 management’s. Sometimes, 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 their targeted investment strategy or asset class is imperative. Additionally, seasoned leadership who have extensive industry relationships hold an edge in terms of sourcing and negotiating opportunities.
- Meaningful track record. Has management’s prior investment programs met their stated objectives? Has management previously done what they said they were going to do? Have they adhered to stated investment parameters and guidelines? Or have they drifted from their 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 a certain degree of humility, 3) enjoy management stability.
Two more attributes of successful sponsors that did not make the top five but are worth mentioning: 1) having established and reputable industry partners, such as law firms, fund administrators and managing broker dealers, and 2) following documented internal controls and procedures in terms of accounting, financial reporting and cyber security.
This list could go on; I received several other thoughtful answers, all of which relate to the core principle of integrity. 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 down the path of becoming a sponsor of investment offerings in the independent broker dealer and RIA industry if they want to experience lasting success in the space.
Chief Financial Officer