Why do so many funds fail to raise capital?
In a world where regulation has pushed towards a more uniform playing field, Communication plays a key role in a funds’ success. The top 10% of best performing funds are successful because communications are an important and proven part of their strategy.
At fund launch the excitement of the fund team involved can be profound. The sentiment they feel is that their idea is brilliant and there is no doubt that the target AUM will be achieved. But the facts are that the majority of the funds don’t reach their expected commitments. More than 70% of the funds don’t reach their objectives! (Source: Fund Radar).
Of course some funds have a misaligned business model but this is clearly not the case for the majority. And it can certainly not be attributed to misguided advice from the different service providers.
Not reaching the expected AUM/target volume is a critical problem and can ring the death knell for funds. So what could be the reasons for such a high “failure” rate? Clearly, something else has gone wrong?
The reason can be summed up in a single word: “COMMUNICATION”. Investors will only commit when they have confidence in a project and when they have enough reassurance that they’ll see a good return on their investment. With poor communication (a 100 page indigestible black and white prospectus, no digital communication…) the investors will have a bad perception of your capacity to embrace changes not only for your communication but also for their own investments.
Communicating efficiently about the strategy/goals of the fund and the expertise of the team is key. This has been hugely and indirectly reinforced by regulation. Over the last 10 years more transparency and more controls have been put in place across all operational domains creating level playing fields. Funds must now make extra effort to differentiate themselves from their peers if they want to be seen by potential investors or to feature on the shelves of distributors. In this highly competitive sector it is no longer enough to define a strategy and identify an opportunity … you’ve got to go the extra mile and communicate efficiently also, in a traditional and ever increasing digital world.
It would appear a rather straightforward endeavour to communicate a fund strategy to a target audience. All funds (regulated or not) produce their own brochures/marketing materials/fact sheets. But are they reaching the target, the investor? Many fund promoters have pre-set ideas of what communications are but too often communicate it from their own point of view, not aligned with the investors’ expectations. This is really killing the attractiveness of your product even if you have the best value proposition/strategy.
The facts, the stats, and our experience show that there is substantial room for improvement around fund communication and establishing the best route to the investor. The launch of a new fund or investment round is truly a vital stage of a fund’s lifecycle. But consistent communication with investors around the lifecycle of the fund is also a critical issue for long-term success. KPMG stated last year in its 2017 Spotlight on the Asset Management Industry that “Achieving a better client experience is a source of competitive advantage, not just a ‘nice to have”.
Funds can now utilise an array of the latest digital technology and reap the benefits if properly implemented. But with so many options available, fund managers need guidance whilst keeping a close eye on the costs and benefits of expensive software licences, advertising budgets and internal processes to ensure they are succeeding in their goal to help sell and retain investments.
In our experience the biggest returns are made when the fund promoter proactively includes the communication strategy as a dedicated stream within the fund launch project.
The return on investment is there! Investing in top class communication most likely produces the greatest ROI for a fund manager. It’s the only cost that will facilitate the fund to gather more assets … and generate money for the fund promoters. All other costs will enable the structure to run but do not fuel the engine!
Early 2018, researchers from the University of Pennsylvania and Southern California calculated that a “1bp increase in marketing expenses leads to 1% increase in a fund’s size”. Especially true for lower bound funds, an increase in marketing expenses has a real, tangible, positive impact on capital raising.
If this resonates with you, interested in learning more on the returns from effective communications, then Finscoms have outlined 4 steps and tips for you:
Integrate the communication in your strategy
Starting to think about your distribution strategy in terms of communication must be initiated at the start of your fund structuring process. Having a clear view of the potential investors and their profiles will help you in tackling the regulatory aspects and identify the right ways to approach them.
Plan an efficient roll-out of your communication
Planning the roll-out of the communication is key. Too early, too late or in an uncoordinated way is a pitfall that funds fall into. You only have one chance to make a good impression, first impressions count
Select the right mix and don’t over invest
Each fund has its own strategy and its own target audience. From a marketing/communication standpoint you have to select the more relevant channels and media to avoid overspending. Each situation is different. There is not a one size fits all approach. Digital marketing, even in a very people related environment like asset management, must be considered as one of the most efficient channels.
Partner with professionals who know your industry, your products and your investors
If you decide to be supported by Communication specialists, select the ones that know your industry and your investors. They will better understand your value proposition and identify the right channel to find the best route to the investors
Would you drive a car without insurance knowing that in more than 70% of incidences you’ll end up with damage? A professional, effective and compliant communication strategy is now more than ever a mandatory addition.
Who are Finscoms?
Finscoms are an independent full services communication and marketing business for those within the Investment Funds, Financial Services & Professional Services sectors. Established by industry professionals with significant experience and expertise, technical knowledge and a proven track record. From funds looking to raise capital in a congested sector, to fund lawyers providing additional services, to launching your new products to implementing bespoke marketing & communication strategies in a traditional and digital environ, Finscoms are affordable delivering instant return on investment. We specialise in providing proactive, professional fund marketing, distribution and communication services to funds and fund managers. We also specialise in marketing support to law firms, trust companies & accountancy firms.