The fight for capital

If your fund does not attract capital, you are just a consultant. You need competent capital, and that means facing global competition

Capital gets channelled to the asset managers that have the best team and an X factor, and that also run a tight ship, according to BAHR Partner Peter Hammerich. In other words: Hardly a cakewalk. A global pandemic may not necessarily smoothen the path?

– The raising of capital for new funds has not come to a halt. The reason is clear. The world is full of capital, and that capital needs to be invested someplace. Stock exchanges are one alternative. Liquid, but involving high risk. Money market funds and bonds are not all that interesting in a low interest rate regime. If you manage an alternative investment fund and can offer a 10-15 percent return net of costs, then you are in a sweet spot, says Peter Hammerich, BAHR Partner and Head of the firm’s Asset Management and Private Equity market group, who makes the following observation:

– So the market has not dried up, but there has been an element of delay. The world came to a standstill because of covid-19, and this had implications. Institutional investors that were considering investments in new funds in February chose to put these processes on hold in March. They needed a bit of a timeout. This is because fund investment is a longterm commitment. You can buy and sell stock exchange investments at the drop of a hat, but private equity funds and other alternative investment funds do not work like that.

– Another aspect that exacerbated the delay is that the

exit market came to a full stop. Investors are reinvesting capital made available through the divestment of portfolio companies. If divestment is not taking place, it also means less capital available for reinvestment. The capital does of course not vanish – it just takes a bit longer.

High activity

Hammerich compares the situation with that in sports. – It is like the Olympic Games. The Olympics this year were postponed, but that does not mean that they will not be held at some future date. Contestants nonetheless need to acknowledge that the Games will, when eventually held, be a different contest from that scheduled for this year. Circumstances have changed.

Covid-19 also had an impact on the investment side, where the uncertainty put a brake on activity for a while. – Asset managers generally find it straightforward to value their existing investments. The challenge is to know what you are buying. Many markets changed overnight in March, and overthrew plans that seemed perfectly viable before the pandemic hit. We were for example working on a major travel industry case, and I think it is fair to say, with the benefit of hindsight, that it was fortuitous that this did not go ahead, says Hammerich.

Despite the delays in the wake of covid-19, Hammerich is reporting a high level of activity in the market for new funds. He believes that 2020 will be a good year to start investing.

– Funds that were established in 2009 outperformed funds established in 2006. If you raise money this year and start investing in late 2020 and into 2021, I believe you will be well poised for strong performance, says Hammerich.

He expects investors’ required rate of return to decline over the next few years.

– When the interest rate is zero, a five percent return will suddenly become highly attractive. I expect capital to be channelled towards alternative investments. This is good news for asset managers focusing on alternative investments, as well as for BAHR, as we work closely with industry players.

Strong team, X factor and discipline

Hammerich and the BAHR team have assisted a number of industry players on setting up new funds and raising capital this year, with HitecVision as one example. He would nonetheless welcome new market entrants.

– We have a sound ecosystem, in which government entities like Argentum, Nysnø and Investinor play key roles. We are nonetheless seeing few newcomers. Why is that? Quite simply because it is challenging, says Hammerich, and makes the following observation:

– You need three things to succeed with the establishment of a new fund. Firstly, you need the right people, and they need to possess certain qualities. Secondly, you need some special advantage – an X factor. We are for example currently working with Bluefront, which will be the world’s first seafood fund. A distinct X factor. If on top of that you run a tight ship, and demonstrate an ability to work systematically on the basis of sound risk management, you only need one more thing: Capital. If your fund does not attract capital, you are just a consultant. You need competent capital, and that means facing global competition.

Multiple capital sources

It is challenging for new asset managers to grab the attention of major international and institutional investors. Some alternatives are nonetheless available.

– If you do not have one or two institutional key investors to help you get going, an alternative avenue may be to focus on professional investors, such as for example family offices. However, these do not have much of a tradition for making fund investments. Family offices want to invest themselves, and be close to their investments. But this is changing, as family offices are beginning to see the value of not managing such investments themselves. They will often lack the X factor needed to succeed with the management of a more diversified portfolio. If their wealth was founded on real estate, they may well decide to remain active in real estate, but leave the management of other investments to others, says Hammerich, and notes the following:

– Institutionalising family offices is a challenging undertaking. I believe that family members should ideally not be involved in asset management. They should not be involved because they are family, but despite being family.

A third source of capital is retail clients. The ever-increasing portion of the population who sit on a lot of capital, and do not want to keep it in the bank at zero interest.

– We are observing a marked increase in this type of capital in funds, and we believe that this trend will only intensify. Marketing to retail clients has been facilitated through a robust regulatory framework, which BAHR contributed to at the time. BAHR was also the initiator behind the Norwegian Alternative Investment Association, which has its own Complaints Board for any disputes. No complaint has been filed thus far, which suggests that asset managers are acting professionally in compliance with applicable regulations, says Hammerich. Although a lot of capital is available, Hammerich believes that existing and new industry players

Peter Hammerich under morgenmøte i BAHRs markedsgruppe for kapitalforvaltning og private equity

should expect tougher demands from investors in coming years.

– Most definitely. We are observing a clear trend internationally, and most of what happens abroad will eventually end up on our shores as well. If, as an asset manager, you charge a two percent management fee and a 20 percent performance fee, then you better deliver. Both to avoid disputes, which I expect we will see more of in future, but also to raise capital from the same investors anew. The competition is fierce, make no mistake about that, concludes Hammerich.