The 3PM / Manager Relationship

Last week I described what a 3PM is and the products that we sell.  This week I will talk about why managers hire a 3PM and what characteristics we look for in a manager client. 

Why managers hire a 3PM?

3PMs generally partner with small, boutique investment managers who lack the internal resources to focus on sales and marketing.  Because many of these firms don’t have dedicated sales professionals, they rely on either their investment team (i.e. portfolio managers or analysts) or members of senior management (CEO, COO or CFO) to fulfill the role of finding investors to buy their products and services.

The problem is that these roles (portfolio management, senior management and sales and marketing), in and of themselves, are full-time jobs.  Given this, should a portfolio manager spend time identifying potential investors?  Should a Chief Financial Officer (CFO) design presentation materials or positioning products?  Probably not, since neither knows much about sales and marketing.  This would be the equivalent of letting a sales and marketing professional manage your assets or having a plumber take out your tonsils while a doctor clears your drain. 

This the main reason for engaging a third-party marketing firm.

What we look for in a Manager Client

Most 3PMs, work with a variety of manager clients at the same time.  Some work with long-only traditional managers offering their investment advisory services, while other will only work with alternative investment managers or fund sponsors. 

At Tessera we work with both.  Our goal is to find the right manager offering the right product.  But what does this mean? 

Our ideal manager clients are typically small, boutique investment managers with between $100-300 million in product assets.  These firms are known in the industry as emerging managers. 

We are looking for emerging managers that know they need help and appreciate the value an experienced 3PM brings to the table.  Importantly, we want a partner that understands that we deserve to get paid for our services.  We commit a great deal of time and resources to a manager relationship and this does not come free. 

The right manager client offers products that are in demand by investors.  Our preference is to work with products that are capacity constrained like Small Cap Equity or fund managers that are targeting a fixed dollar amount that they want to raise rather than ever-green products which may never close.  Capacity constrained products offer a bit of cache, since there is a limited supply of the product.  Investors, like most people, tend to gravitate towards things they can have that others can’t. 

We typically steer clear from products like Large Cap Equity or Long / Short Hedge Funds unless there is a compelling competitive advantage that differentiates the manager from its peers.  Product areas where there are too many managers offering a similar product are problematic for smaller firms.  Investors would rather hire an experienced firm that has a long track record, substantial aum and is financially stable than take a risk on smaller, unknown entity. 

We often hear that performance is not the important factor investors look at.  While this may be true, performance is still one of the main determining factors as to whether a firm will raise assets.  Let’s face it, how many investors want to hire a manager that has been in the third or fourth quartile since the inception of the product? 

Investors often use performance to reduce the potential manager list down from maybe 100+ firms to list of maybe 5-7.  It is not uncommon to see a search's minimum criteria include some performance hurdle.  Remember, the investment management business is an exclusionary business, rather than an inclusionary one. 

This doesn’t mean that a manager must be in the top decile in every period, but the manager probably needs to rank in the first or top-half of the second quartile in most periods to be considered.  Once it is determined that a manager meets some minimum performance criterion, then performance may not carry as much weight in the decision-making process.  Given the choice between two firms with similar performance, investors are likely to focus on other factors such as aum, personnel, process or some other relevant factor. 

When looking for a new manager client, we try to find an emerging manager that will meet most of the requirements investors are looking for.    

At Tessera, we also want a manager client that is:

  • Aware of its strengths and weaknesses and one that will own who they are – recognizing that they cannot be the right choice for every investor. 
     
  • Willing to work in concert with a 3PM and recognize our experience, rather than dictate how we should work – if they don’t, it is because they either don’t trust us or think they can do it better on their own.  So why are they trying to hire a 3PM anyway?
     
  • A firm that is cognizant of the fact that raising assets takes time - we will not show up at their door with $100 million in three months – the market just does not work that way.
     
  • We are looking for a partner – not for a year, but for the longer term, who we can work together with to do great things!
     

Next week we will look at what services a 3PM provides.