HedgeFund Networking

Creating connections and providing knowledge for investment managers.

Using a Third Party Marketer

March 5, 2014 |

An interview with Richard Beleutz, CEO of Alternative Investment Resource LLC

This article originally appeared in The Woodfield Wire, a newsletter by Woodfield Fund Administration LLC

While the private investment fund industry seems to undergo constant change, one aspect of the business that remains constant is the need for most managers to raise capital. And while raising capital has never been easy, it has become even more challenging in the wake of the financial crisis of 2008. This is particularly true for new and small managers. One option for managers seeking capital is to engage a third party marketing firm. This month’s issue of our newsletter contains an interview with Richard Beleutz, the CEO of Alternative Investment Resource LLC, a third party marketing firm based in Chicago that represents a number of hedge fund managers.

What are the most typical mistakes that managers who aren’t experienced in marketing make? The biggest mistake that I see inexperienced managers make is when they oversell what they do. Because this is their passion, their knowledge base, what they know and love, often, they fail to adapt their sales process away from the one that got them money from their friends and family. This process is usually based on their personal connection with these people and working to instill belief in their abilities through a personal pitch. But when they try this approach with institutional investors it typically doesn’t work because the decision making process is much more analytical and often committee-oriented. It’s more about presenting information, demonstrating an ability to manage a portfolio and to run a business. Those are the key things a manager should be focusing on and not just trying to convince the prospect that he knows how to make money trading or investing.

What should a manager look for when hiring a TPM? First and foremost, there should be a mutual trust and excitement about the engagement from both sides. Secondly, it is important that the TPM can understand and articulate the strategy effectively. Also, the professionalism, experience, and focus of the TPM is important to assess.

What does your firm look for in a manager? I’ll use a hedge fund manager as an example, although we raise money for a wide range of strategies and other types of vehicles including managed accounts, private equity funds, non-traded REITs and mutual funds. We have clients in all those different areas. One thing that makes us unique is that we’re agnostic with regard to product structure and have a pretty wide reach in different distribution channels.

The first thing we want to do is to make sure that the manager is of high quality; somebody who can both manage a portfolio, as well as run a business. We work with early stage managers and we work with more mature, late stage managers. We, especially, like emerging managers, guys that are in the early stage of receiving allocations from institutional investors, because we find that we add more value by bringing our investors a manager that is unknown to them, and they tend to perform better. This manager may have allocations from family offices, a few fund of funds and people from their own network, but typically not established distribution. Like most investors, we like to see that they have a lot of their own money in the strategy. We like the managers that have built businesses before, or have a good team around them that knows how to build a business. We like a couple years of a successful track record before the launch of their fund. We like strategies where it’s easy for them to articulate what their edge is. Niche strategies that have good risk-adjusted return potential are also of interest. We’re in the business of linking managers with investors, and that’s how we get compensated. So basically we look at what’s investable.

Second, we are interested in the timeliness of the strategy. We’re not looking for what’s going to be hot in two years, or what was hot two years ago. We’re looking for what will be interesting to investors now and over in the next year or so.

We also need to check for conflicts relative to people we already represent. The fund’s principals and the traders are also really important. That’s how we analyze whether this will be a good fit for us. Then we describe a business and sales process, which is really one of the key factors that will determine if we’re a good fit for them. We also need to trust the manager. And it’s very important that we actually like the manager because we’re going to be working with them. I’m old school in that way, I believe that you should like your business partners. It’s much easier to resolve differences and conflicts and exchange information when there is a good personal relationship.

Do you coach managers on how to present to clients? If so, what’s involved? Some managers are good presenters, some are horrible presenters, and some are in between. Typically we will have them give us a presentation during the initial interview process. This gives us an idea of how much work we will need to do with them. If they need a lot of help with their presentation then we will incorporate this into our engagement. If it is the case that they need a lot of work on their materials, presentation, etc., we will build that into the timeline of deliverables, as well. If that’s not a specific deliverable, we’ll always give them specific feedback as part of the sales process after meetings with prospective investors. Prior to investor meetings, we coach them on what key points to hit and how much time to spend on certain topics, what topics to avoid, how to answer questions that we expect they will be asked. We will even give them coaching on eye contact, mannerisms, and the non-verbal aspects of communication, as well as the verbal aspects that are unrelated to talking about their strategy.

How much do TPMs charge? The gold standard for success fees for third party marketers for hedge fund and other non-PE based incentive fee products (SMAs) is 20% of all management and incentive fees, for as long as the money is invested. With that said, deals do vary on a deal-by-deal basis depending on the size, pedigree, and maturity of the manager as well as the abilities and stature of the marketer. Variations include a one-time upfront payment or a hybrid of upfront and back-end payment at close. I’ve seen as high as 50% of management and incentive fees for new managers and as low as 10 basis points for very established managers charging low fees for an SMA and doling out a few names. PE deals tend to pay out 100% upfront. A one-time fee, 2%, is a typical payment for those type of deals. Additionally, many TPMs will charge a retainer. The retainer may or may not be structured as an advance against future commissions. The retainer is typically used by the TPM to cover their operating costs and some non-reimbursable expenses.

What are the typical terms of the agreement between a manager and a TPM? TPMs typically have a Schedule A attached to their agreements that identifies their approved investors that they are permitted to call on to help avoid conflicts. Usually there is some language in the termination clause that protects the TPM for a period of time after the engagement ends that states the TPM will be paid on those investors if they invest after termination.

How does the process work once I have hired a TPM? Depending on the mandate of the TPM, there is typically an investor list submitted, then an outreach process. The TPM, sometimes, will set up road shows, help with marketing materials, and attend conferences.

Can you describe your sales approach? The process is customized and is different based on the sales channel and the salesperson. I’ll outline a tangible example of what we’re doing now to give it some specificity because they are customized. For example, two of our sales people have been assigned to a hedge fund we are currently working on. The first thing that we did was to identify a list of people we wanted to approach. Then we presented the list to the manager because this is a semi-exclusive engagement. Once those names were approved and our sales team was appropriately trained on the product we initiated contact.

We started off by sending an email with an executive summary describing the manager. We did that through our CRM, and it tracked if the message had been delivered, who opened it or if it bounced back with a bad email address. Next, we did a follow-up phone call to try to generate a conference call with the investor. This initial phone contact sometimes gets into a bit of details and is actually the first mini presentation.

This call would last about 30 minutes, after, which we would follow up to determine their level of interest. If we garner enough interest in a particular geographic area, we arrange a series of meetings sometimes anchored around a conference or event.

What happens after that? After the roadshow, assuming that a particular relationship goes well, the manager may be entered either on a watch list or engage in due diligence. It is typical for fund of funds and consultants to keep a sizable list of funds that they track. They do this for many reasons but primarily to familiarize themselves with potential managers and have a pool of opportunities that they can pull from when it is time for them to make an allocation. When a manager progresses into due diligence, it should be prepared to provide additional documentation and most likely will be required to host a site visit. A typical due diligence process for a fund of fund lasts from 3-6 months when looking at making a hedge fund investment.

How long does it take to start seeing results? If by results you mean investment dollars closed, then usually 6-12 months for hedge funds is a reasonable time frame. If the TPM has a HNW following then assets could start flowing right away.

Can a manager still look for investors on its own after engaging a TPM? Yes. Depending on the strength of any exclusivity clause, the manager may have to still pay the TPM. However, it is common to have a carve-out feature even when there is some sort of exclusivity. In a non-exclusive engagement, the TPM owns the leads that are approved in their Schedule A. In a fully exclusive engagement the TPM owns all of the leads for the firm.

Aren’t some investors unwilling to work with sales agents not directly employed by the manager? Yes. As discussed there are some state regulations and some investment mandates that prohibit or restrict a manager’s use of outsourced placement agents.

What registrations must a TPM have? In order to receive commissions for sales of securities a TPM would need to have a Series 7 (General Securities) or a Series 82 (Private Securities Offering). Less common TPM registrations include the Series 3 (Commodities Futures Broker) and Series 6 (Investment Company Products). Most TPMs have the Series 7. A fairly new registration, which requires less studying, includes the Series 82 that allows the rep to sell only private placements. The Series 6, 7, and 82 are typically accompanied by a state registration, the Series 63 (Uniform State Securities Agent). The Series 3 is for brokers that receive a commission on commodities or managed futures transactions.

How does a manager find a third party marketer? There are a number of different ways. The most prevalent industry organization is the Third Party Marketing Association which has a list of association members. Another way to find a TPM is by talking to service providers such as attorneys, administrators, prime brokers, accountants and auditors and asking for a referral. They typically know credible third party marketers and are willing to make an introduction. Talking to other managers, attending industry conferences and events, and web-based searching through sites, such as Google and LinkedIn, are other common ways to find a TPM.

What to stay away from when hiring a TPM? I’d say that TPMs that overpromise or oversell their abilities in the interview process is a red flag, especially if there is a retainer involved. The TPM could be more motivated to get a retained gig than on finding product that is a really fit with their skill set, target market, and abilities. Also, it is important to avoid working with a TPM who is not properly licensed.

What are the most common problems that occur in a relationship between a manager and third party marketer? A lack of a relationship or having unclear expectations laid out ahead of time can create significant problems down the road. Some managers view TPMs as a commodity. Some TPMs view managers as a commodity. I think when you view each other as a commodity versus a business partner, you can run into issues. For example, if you don’t have a lot of immediate sales activity and the manager views you as a commodity, they may not give the TPM the resources it needs to be successful, which can cause the TPM to lose interest and focus elsewhere. I think building a strong foundation of trust and relationship is crucial to overcome early missteps on either side. Another example could lie with the manager having a misstep in performance. Having a good relationship with the TPM and making sure that they understand the product well increases the likelihood that the TPM will stick out the now, more difficult endeavor.

Tell us about your firm and what makes you unique? Because I have been a partner in a couple of hedge funds in the past and have helped launch a mutual fund and several SMA products, we understand the business from the manager perspective. Additionally, we have distribution resources that we can deploy in each of those channels. Our firm can not only advise on product structure, but can also provide distribution. We provide a big picture perspective that often eludes an asset manager that doesn’t have experience in a specific channel.


Richard N. Beleutz is the CEO and Managing Partner of Alternative Investment Resource, a Chicago based boutique financial services firm focusing on third party marketing, wholesale distribution, and investment banking. Mr. Beleutz founded AIR in April 2004 and is responsible for the strategic direction of the firm. He directly oversees the Institutional Sales group and is responsible for integrating selling efforts across the company. He is also involved with all aspects of the capital raising process, including evaluating deal flow and building distribution channels to capital placement negotiations. Mr. Beleutz’ knowledge of financial markets has earned him television appearances on ABC News. He holds the Series 3, 7, 9, 10, 24 and 63 securities and principal licenses. He received a BA in Economics from the University of Michigan in 1992. Richard is also an avid skier and enjoys travelling. Richard Beleutz can be contacted at (773) 230-2759 or via email at rbeleutz@ai-resource.com.