Breaking into the local asset-management industry can be challenging given the dominance of big brands and the need to build relationships with distribution channels that control access to institutional and retail assets.
Start-up firms have high organisational and business risk. It is important that investment professionals assess the landscape before opting to start an entrepreneurial firm.
The 1990s saw the birth of a number of independent asset-management firms, nearly 40% of which have since vanished or have merged with or been acquired by other firms. The first seven years of existence of a firm are perilous, with a high casualty rate. Indeed, the average life expectancy of the failed firms that started between 1990 and 2013 was five years. Why did so many fail? For many reasons – extreme market volatility, poor performance and an inability to grow assets and build sustainable businesses, lack of differentiation, poor business models and unfounded optimism on how long it takes to build a firm, lack of financial conservatism, and lack of steadfast shareholder support. Some firms that survived the first crucial years later faltered through failure to innovate or because of an ossifying culture that lacked focus and controls, which often affected returns.
The most significant steps a start-up asset manager can take to set the firm apart in a keenly contested market place are to deliver top performance, provide impeccable service, build a solid reputation and protect it at all costs. To compete and thrive, firms require strong relative results, enough resilience to overcome periodic underperformance and the inevitable market crises, and the ability to recover when the market bounces back. Astute leadership, a single-minded focus on excellence and business agility are essential ingredients for success. Embedding a strong company culture and values within the firm helps a business attract and retain talent. This culture allows portfolio managers to flourish, and helps set the firm apart. Paramount is building a team of quality people with high-level investment expertise that will earn the trust and support of clients and consultants.
Securing “patient” assets at the start that afford the firm the time to establish a foundation for a sustainable business is critical to survival. This core amount of patient assets to build a performance track record often comes from private clients, friends and family, incubator funds, and personal savings. Introducing a strategic shareholder that can inject capital into the business is another source of assets in the early years.
While changes in the ownership structure could reduce owner independence, supportive shareholders can play an important networking and signalling role and provide much needed moral support at a critical stage in the life cycle of the firm. A well-negotiated shareholders’ agreement that sets the parameters of management independence and establishes a governance framework helps ensure the longevity of the firm. Institutional clients only trickle in once there is an established public track record, typically after three to five years. A lean start-up when the business is sub-scale is important, and saddling a business with high costs is risky. New firms also need to temper growth expectations and build a significant margin of safety via their capital base to survive the first five years. While an entrepreneurial culture with a strong desire to succeed often pervades small firms, their aspirations are limited by small assets under management, few employees, short institutional track records, lack of brand awareness and limited marketing effort. Yet good managers often produce their best returns early in their life cycle, when potentially greater investment flexibility allows them to build concentrated portfolios focused on stock picking. Without top performance, a firm is unable to grow assets and inevitably fails. Essential for success is a competitive performance track record that can capture the interest of umbrella funds, multimanagers, consultants, independent financial advisers and wealth managers and get a firm “voted” onto consultant “buy-lists” and retail investment platforms
However, an extended period of underperformance can result just as rapidly in an outflow of assets.
A targeted marketing effort that positions the firm, highlights the performance track record and aims to build relationships with distribution channels is key to growth and sustainability. New firms need to understand the different channels, the manager-selection decision-making process and how best to engage prospective clients, as well as the client sale cycle or the time it takes to make decisions. Building credibility and trust takes time and requires continual communication. In addition to face-to-face interaction, technology increasingly offers a cost-effective way to connect with clients. The savvy use of email, Twitter, apps and YouTube to share performance, investment views and thought leadership reduces the need for massive client-facing and marketing teams. Once a business has a solid track record and meets the requirements of the targeted distribution channels, the potential to grow assets is enormous. Breaking through the gates leads to flows from institutional, wealth and retail distributions and inclusion in products and client solutions.
Firms that invest in the skills necessary to succeed in handling consultant relationships and gaining access to distribution channels, and have empowerment credentials, are also likely to do well. In 2008, many young firms won first-time mandates from the Public Investment Corporation (PIC), and with over R1 trillion in assets and growing, the PIC will continue to play an influential role in supporting transformation in the asset-management industry.
Building a new asset-management firm is a long-term endeavour. Stiff competition, market volatility, falling real returns, shrinking pools of funds, the growing attack on active management-fee levels and increasing regulatory compliance costs will keep the industry under pressure. Persistence, perseverance, performance, fair fees, business agility, a demonstrable commitment to build a sustainable business, a clearly defined process and the ability to articulate competitive advantage in a market with low perceived differentiation between firms are critical. Skill, luck, patient investors and shareholder backing will be key to the longevity of firms. A challenge for investors will be to find those investment managers that will be successful in the future, which necessitates a rigorous and repeatable selection process.
