with their traditional success fee. They attract managers with promises of massive sales forces dedicated to raising assets. Although the lure of a professional sales staff and low monthly fee may initially seem very attractive, man- agers soon discover that their external sales force may be oversubscribed. Third-party marketers have an incentive to contract with as many managers as possible, regard- less of time availability among their agents or ability to sell a product. Moreover, even if TPM agents have the time and interest to represent a product, it will take a long time to connect with a cash infusion. The sales cycle in investments tends to stretch over many months and years—not days and weeks. Consequently, emerging managers might ultimately be paying the same rate for a part-time, non-exclusive agent as they would for a full-time employee. Hiring a sales director can improve matters, but after paying a high fee, the net benefit may only widen the break-even gap. Sales agents in financial services command salaries/bonus well into six figures—far out- stripping the affordability of most small companies. By necessity, nascent firms must either forgo expensive per- sonnel or apply a new compensation structure. Unfortunately, the landscape for sales agents in the investment industry is also cluttered with a wide- ranging talent mix that is often difficult to discern. Top sales agents typically work for major organizations and command very high salaries. In order to entice them to a small firm, it may be necessary to provide an equity ownership stake. Again, there would be no assurances that their existing success would be transferable to a small firm with a different performance track record and management team. Moreover, if an emerging manager has only $15 million or $20 million in AUM, there would be insufficient reserves to pay for the new sales agent/partner without personally subsidizing the opera- tions from savings. This creates a conundrum when a new equity partner receives a salary and equity stake at the expense of the founder. Moreover, the high-power salesman is typically accustomed to fancy travel per- quisites and an expense budget that is no match for an emerging manager. Five star hotels, first-class air travel, high-end restaurants, and enormous expense accounts are the bane of a struggling entrepreneur’s existence. Entrepreneurs thrive on a low-cost environment and efficiency in operations. Ultimately, investors can end up paying asset raisers the same amount that they do for the people actually
managing their money. Importantly, in the attempt to force fund managers to lower management fees, there are a lot of fees that go unnoticed by investors, such as custody fees, currency fees, trading costs, etc. The good and bad news for emerging managers is that sales are becoming the most important part of oper- ations. Institutional investors are very sophisticated, and they no longer are interested in speaking with a smooth salesman who understands little of the investment pro- cess and operations. Investors want to speak directly with the fund manager, analysts, traders, and compliance staff. Consequently, the focus on the emerging manager should be to leverage existing talent and performance track record and engage with professionals for quality materials and dissemination. Another approach to acquiring assets has appeared with changing market dynamics. It is an unpalatable practice, employed by a few, that feeds on the desperation of struggling emerging managers. Given the difficulties for managers to afford a successful sales team, opportu- nistic sales agents have begun teaming up together to acquire cash-starved managers. They don’t prey on all managers—they seek out those with strong performance track records and relatively low assets. Sales organiza- tions lure managers to meetings extolling the virtues of their sales teams with promises of future AUM growth. These agents are extremely aggressive. Despite having relatively modest interaction over phone or email, agents are quick to discuss deal terms shortly after meeting face to face. In essence, agents expect the manager to cede all day-to-day control of operations and focus exclusively on portfolio manage- ment. They provide the manager with a small minority equity stake and earn out upon acquisition, but terms include heavy overhead for executive management and sales staff. Close inspection of the terms show an insidious wealth transfer. Overwhelmed managers may accept these terms because it allows them to focus on the investment strategy and trading of operations. But it comes at a heavy price. The layers of bureaucracy built into the deal ensure that future payouts will be modest. Virtually all of the rewards shift to the sales agents and executive staff, with relatively small residual f lows available to the emerging SALES AGENTS TURN MANAGERS FROM ENTREPRENEURS TO EMPLOYEES
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T HE E PHEMERAL L IFE OF AN E MERGING F UND M ANAGER
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