Are the traditional fund structure’s days numbered?

By Sam Plumptre on Friday 7 October 2016

Opinion

With crowdfunding, peer-to-peer investment and lending money to small businesses now regularly advertised on the tube and available to the mass market, it is clear that “AltFi” has broken into the main-stream consciousness.

These large scale campaigns have successfully generated wider retail investor awareness of the potential of alternative investments. At the same time, technology and other factors have influenced a fundamental change in investment behaviour.

The result is a retail investment environment in which investors not only have a huge propensity to transact online, but now actively seek to invest in alternative investments, considering this to be a norm.

Current distribution models are archaic

In this current competitive environment, forward thinking fund managers are rightly questioning the future of their businesses within this rapidly changing sector. This question is especially pertinent for smaller, retail focused fund managers whose distribution channels are under threat from the move towards online.

For smaller asset fund managers with £1bn or less in assets under management, the typical modus operandi is often to publish a prospectus and form strategic partnerships with financial advisers and wealth managers. While it may look glamourous at the outset, the intensely competitive industry means that fund managers often have to spend days, weeks or even months on the road, selling in their fund to financial advisers and wealth managers.

As a result, this can be an expensive and time consuming process which often is a substantial distraction from the fund managers’ core skill of making, and managing, investments. What’s more, to ensure long term viability of the fund, this time-consuming process frequently becomes part of a fund manager’s day-to-day job.

Arguably not sustainable in the long term, alternative fund managers need to secure new types of distribution channels to augment their current offline distribution models used to raise new funds.

Co-investment trends are gathering pace

Vast numbers of alternative asset fund managers have operated co-investment structures alongside their core funds for many years. This provides flexibility when financing investments, allowing for speed, sharing of risk and alignment of investors’ interests. This has historically been largely at the institutional level, but has naturally filtered down into the retail space.

Looking outside the retail market, there are significant co-investment trends across most of the private equity and venture capital markets – at both an institutional and a global level. This increases when one starts to add the investment behaviour of family offices.

Preqin’s Investor Outlook Alternative Assets H1 2016 refers to the growth in appetite for co-investment from LPs, listing the specific benefits of co-investing comprising, amongst others, better returns, lower fees, more control, and access to specific deals of interest. Alternative assets fund managers which have not caught the boat risk being left behind.

Alternative asset fund managers need a digital solution

To futureproof their businesses, alternative asset fund managers urgently need a digital solution.

However while fund managers are often willing to develop digital capabilities, not all have the resources or the capacity to build a new digital platform from scratch. In such situations, fund managers should consider having strategic partnerships with existing platforms.

Such platforms can provide an additional digital distribution layer, allowing a fund manager to increase their assets under management for no extra effort and yet implement co-investment structures.

A number of funds, including Downing and Octopus, have already begun to capitalise on wider AltFi trends by launching Downing Crowd and Octopus Choice which distribute bonds and peer-to-peer debt products digitally to private investors.

These examples are early evidence of asset managers evolving and augmenting their existing distribution models to complement their current fund structures. These early movers are effectively future-proofing their businesses as the wave of offline financial services migrates online.

Sam Plumptre, CEO, CoInvestor

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