Investor Categorisation – Insights from Richard Wilson of HFG

hong-kong-hedgethink Investor Categorisation - Insights from Richard Wilson of HFG

A recent appearance by hedge fund industry thought leader Richard Wilson of the Hedge Fund Group (HFG) at a recent Capital Raising Workshop in Miami has shone new light onto the way that institutional investors approach the issue of portfolio management.

In the talk, Wilson explained how different institutional investors look for different qualities in an investment and manage their portfolios with unique timelines, responsibilities, and expected terms. For instance, it might be the case that an endowment might be willing to commit large sums towards a certain private equity fund for a number of years, or it might be that other investors require a greater level of liquidity to give them more flexibility about the timing and evaluation time-frames of their investment.

The big take-away from the talk was this: If you are separating your LPs by investor group alone, you will miss the details that are inherent with each investor type regardless of investor class.

To illustrate this point, he used the example of the Ontario Teachers Pension Plan and compared this case with that of other pensions. The OTPP is a special and oft-quoted case, as it made waves within the industry by circumventing the traditional fund structure (along with the associated fees and constraints).

Over time, OTPP has evolved its level of expertise, and the methodology behind the execution of its club deals and direct investments, to the point where it is regarded as a leader in private equity investing.

The reasons for the OTPP’s purposeful setting apart of itself to most of its peers in the pension fund business – such as having a more liberal investing mandate and the ability to bid competitively – are many. If a private equity firm were to approach the OTPP without a prior knowledge of its history and philosophy, and assumed that they were looking only to make private equity investments through third-party funds in the customary pension fund manner, they would most likely leave empty handed.

This shows the folly of generalising, and this is a point that Wilson expanded upon to include wealth brackets, with the term ‘high net worth’ becoming increasingly ill-defined and therefore useless as a descriptive term.

His tips for builting a more focused relationship with LPs are as follows:

Understand Why We Sort: The tendency to sort investors into groups
and sub-groups is entirely natural. When faced with a complex problem,
our minds reflexively look for ways to sort and file the information.
Investors are no different. When you meet and endowment fund, for example,
your mind will immediately form associations with what you know about other
endowments and more broadly, the typical stereotype of the endowment.
This is helpful because it allows us to process the information quickly and
many of the associations are correct but you have to keep in mind that you
don’t have the whole story until you really take the time to understand
this particular investor.

Seek Out Differences: As you are getting to know your current or
prospective investors, actively search for what qualities distinguish this
particular investor from its peers. Are they exiting an allocation right
now? Is the fund inexperience? A veteran of the asset class? What did
the CIO do prior to this position? Eventually, as you seek out this information,
you’ll have a more detailed profile of the investor and be able to more
adequately serve the investor and deliver superior investor relations service
than your peers that only regard the investor as an endowment, a pension, an
insurance group, etc.

Listen, Repeat, and Record: It’s perhaps the most basic advice I give,
but I give it often to capital raising workshop audiences, consulting clients,
my staff, and, of course, myself. Listening is one of the more overlooked
actions you can take when getting to know a client. Most of us are
thinking of our next question, wondering what we’ll have for lunch, or doing
something other than listening carefully to what our client is saying.
If you find yourself nodding along and not listening, challenge yourself
to repeat what the other person is saying so that you are sure you really
comprehend and understand what they are trying to convey. This helps you
remember the conversation better, ensures you understand their position,
and signals that you are listening. Finally, record the conversation in a
notebook or on your laptop after the meeting so you know exactly what was
said at the meeting.”

Wilson states that these are the pieces of advice that he has found to be most useful for helping to build a closer, more powerful relationship with LPs and family offices. Another favourite tactic of his is just to make himself more accessible: “by hosting and attending conferences and listening to the CIOs and executives speak. We’re hosting a conference in Los Angeles next month that is 100% focused on family office CIOs. If you’d like to hear how these family office investors view the investing landscape and make allocation decisions, join me at the Los Angeles Athletic Club on June 6th”