The $61.3 billion multialternative funds category is a rapidly expanding market, growing a staggering seven times larger over the past 10 years. The Cerulli U.S. Intermediary Distribution 2017 report pegs the alternatives category with three percent of the nearly $18 trillion of advisor-sold assets in 2016,and most of those assets are sitting in the portfolios of high net worth investors with $2 million in investable assets or more, advised by registered investment advisors (RIAs). In an effort to grow, firms such as Apollo, Blackstone, Carlyle and others that initially brought their capabilities to institutions are looking for efficient ways of getting RIAs to invest in their products. The firms have built up their presence in the market for non-traded business development companies, real estate investment trusts, closed-end funds and interval funds over the past few years through a mix of joint ventures, acquisitions, subadvisory mandates and building their own sales apparatus.
A recent article in FundFire about the different approaches that these firms are using to build sales and marketing distribution included my thoughts on whether to build it in house or to buy it by acquiring a sales team and systems. Here are the three most important considerations in that decision.
- The level of specialized investment capabilities needed: Alternative funds are in high demand by RIAs, but evaluating their merits relative to portfolio needs isn’t straightforward. Answering the questions raised by RIAs is challenging even for the best institutional salespeople, so he or she typically relies on specialists such as portfolio managers or analysts for deeper expertise. On top of that, it could take an experienced wholesaler at least a year to cultivate a known territory with a new set of products. The main point here is that it takes time to build the expertise and more than the salesperson to sell. What’s the best approach for helping advisors evaluate and manage portfolios with complex products? What will it take to build the specialized capabilities?
- The efficiency of the sales and marketing strategy: Accelerating the pace of asset gathering is crucial for new products, and it’s even more important in early stage opportunities. Even if I assume that this particular opportunity comes with a relatively low ceiling (say, an additional $60 billion in AUM over the next five to10 years), the potential revenue opportunity easily exceeds a few billion dollars. So, the faster you get the assets, the greater the revenue. Taking a “shotgun” approach and trying to reach all RIAs with email, calls and meetings is a waste of effort. Using data to really understand which advisors (and their portfolios) could use the product and then attempting to reach them is a better approach. The toughest part of this process is actually getting access to the decision makers. If you get access, a dedicated sales force increases the odds of growing assets. Would a sales force representing many asset managers replicate these odds? Will they have enough capacity and pay enough attention to your product?
- The overall cost of distribution: The cost of sales is not just the total compensation of the sales team or the fees paid to a third party. First, there is the initial investment to start a distribution effort (creating one from scratch is the costliest way to go) and setting up a new relationship. The costs for recruiting, training, marketing and lead generation, specialist services, customer services, data and reporting, compliance services, and the like are not trivial. It’s less costly if you’re expanding an existing team or relationship, of course. Continuing to maintain and build all of these capabilities isn’t cheap either. The initial cost of setting up distribution may be lower with a partnership, but does it make the most economic sense in the long run?
These three considerations are the relatively black and white ones, since they are highly quantitative and fact-based. From my experience, the infusion of softer issues like brand impact, firm culture and executive/board preferences results in many shades of gray, truly complicating the decision. In the end, the decision to build or buy really comes down to matching the opportunity (in this case, a few billion dollars in revenue) against the level of effort to maximize the return. My ultimate recommendation? Build a sales and marketing machine that can outpace your competitors two to one.