Co-mingled messages

Funds of funds need to broadcast a differentiated marketing message amid a crowded field, but this often conflicts with a desire to remain lowprofile. By David Snow

In one respect, at least, funds of funds have it easy – while the general partners of direct private equity funds have to distinguish themselves to a potential client base of thousands of middle-market companies, fund of funds GPs typically already know which GPs they'd like to place capital with, and there aren't thousands of these, or even hundreds.

In cultivating LPs, however, funds of funds have a difficult row to hoe with regards to marketing. Funds of funds are frequently the vehicle of choice for smaller institutions, for individuals and for investors that are new to private equity. Not only is this potential client base often unknown to the fund of funds GP, but when contact is made, the investor often lacks the sophistication to compare one fund of funds against another.

Now more than ever, funds of funds need to carefully craft a marketing strategy facing their own LPs and potential LPs. The funds of funds business has become very competitive and each firm is jockeying to position itself as providing superior access, superior selection ability and superior structure. But funds of funds in general are not used to thinking in terms of a unified marketing and communications strategy – after all, private equity is such a relationship-based business that things like corporate-image building have often taken a back seat to one-on-one interaction. As private equity services push into new frontiers, however, marketing prowess is becoming a strategic advantage.

?We all deal with the fact that funds of funds are marketing to new investors to the asset class,? says Charles van Horne, a managing director in charge of marketing and client services at New York fund of funds Abbott Capital. ?One of the things that new investors often say is ?All funds of funds sound alike.? So the real issue is, how do you really differentiate yourself? How many times have you heard people say, ?We invest in firstquartile funds???

Marketing for a fund of funds can take many forms – a phone call program, conference participation, direct mail campaigns, advertising, press strategy, online presence, the look and feel of marketing materials.

Van Horne says his firm thinks of marketing more in terms of the message than the medium. Whether Abbott Capital's strengths are communicated at conferences or in investment reports, the firm seeks first to educate. ?It's almost proselytizing,? says van Horne.

In an industry that is starved for information, van Horne says existing and potential investors increasingly appreciate analysis in marketing materials. Indeed, several funds of funds now highlight access to data as a key benefit to committing capital with them.

It is difficult to draw a clean line between fundraising and marketing. As one fund of funds partner notes, his firm raises capital for a new vehicle every other year, and therefore, ?We're pretty much always in the market.? Marketing, broadly defined, represents a sustained effort to convey a message about the firm's services, which of course should bear fruit when its time to garner capital commitments.

Indeed, while funds of funds must frequently scout for new investors, a marketing strategy should be geared to reinforce the message for existing investors. Funds of funds have a captive audience in existing investors because of the frequent communication required between LP and GP. ?In the industrial world, it can cost five times as much to get a new client as it does to keep an old client, and it is probably not too different in our world,? says van Horne, who notes that more than half of Abbott's last fund's capital comes from prior investors.

Beyond that, van Horne says he tries to cultivate new investor relationships through frequent networking and by attending and participating in ?quality? conferences, although Abbott Capital does not sponsor such events. The firm occasionally pays for a tombstone advertisement.

Be subtle
Brian Murphy, a managing director at Darien, Connecticut-based Portfolio Advisors, says his firm concentrates its marketing efforts on the consulting community, as these advisors represent a significant portion of the endowment and corporate pension world. These efforts are supplemented by a direct calling effort to institutional investors that may have a general or specific need for Portfolio Advisors' ?menu-driven? fund of funds program.

The personal preferences of firm founders, not to mention regulatory strictures, makes ?marketing? a scary word at some funds of funds.

Solomon Owayda, the Boston-based chief investment officer of SVG Capital, says he questions the effectiveness of market-canvassing approaches. ?I've been in the business 18 years, and I don't think that a mailing campaign is something you need to do if you have a good product,? says Owayda.

Instead, Owayda prefers to tell SVG's story in ?subtle? ways, such as through media meetings and at conferences. ?If you spend a few minutes on us, you will understand the quality of the people that we have – that we're not a bunch of rookies – and the process that we have, and this sells us,? he says. ?Word of mouth is as good of a marketing tool as anything else. When you go to conferences, people see you and say, ?Ah, by the way did you know that so-and-so is looking for a fund of funds manager.? That's much more valuable.?

SVG Capital professionals frequently attend conferences and have retained an external public relations firm, London-based Penrose Financial, to arrange media introductions.

Reg D conundrum
Particularly in the US, and for any group that seeks to raise capital in the US, the scariest aspect of marketing is not knowing the grey area between responsibly conveying your firm's capabilities to the right people, and violating Rule 506 of Regulation D of the Securities Act of 1933, which stipulates that private (unregistered) fund managers may not engage in ?any form of general solicitation or general advertising? such as ?any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio? and ?any seminar or meeting whose attendees have been invited by any general solicitation or general advertising.?

How this rule is put into practice varies from private equity firm to private equity firm depending on the advice of counsel. Some counsel are very conservative and place a ban on almost any public statements during fundraising, even if the statements are not specifically about the fund. Others simply warn GPs against talking up a fund, but sanction discussing a firm's strategy generally.

Not surprisingly, legal advice on the conservative end of this spectrum can put a damper on marketing ideas involving conferences, print ads, working through the press, and just about any other form of general outreach. Funds of funds, because they often interact with individual, albeit accredited, investors, are often told to exercise an added degree of caution.

A GP at one fund of funds manager, who, naturally, declined to speak on the record, says his firm's counsel has ?very specifically told us we can't talk to the press about our funds, we can't talk about investment process. They say if we breach the SEC non-solicit rule, they'll have to pull our fund from the market.?

He adds that his lawyers' strict definition of Regulation D has been ?frankly, the toughest thing for us. If you look in publications, you don't see our fund mentioned. Many times we're not on the lists of funds of funds? because the firm never communicates basic information about fund activity.

?Being a guy that spends three-quarters of his time on the road, I want every advantage that I can get,? says the fund of funds GP. ?But when we have a fund closing, we don't announce it. Then I see other [funds of funds] doing this and I say, ?Oh my gosh, look at that article about them.? I sure with that was available t us, but our counsel has told us it's not.?

The GP notes that European fund of funds managers, which when not fundraising in the US are not bound by Regulation D, are ?much more aggressive? in their marketing campaigns. But as for the idea of ratcheting up his own marketing efforts, the GP says, ?Things are going too well for us to take those risks.?