Controlling Key Factors That Appear Insurmountable
At the end of 2017, total assets under management in the US were $37.4 trillion USD, which compares to the UK/EU combined $22.2 trillion USD (2018 Boston Consulting Group: Global Asset Management 2018: The Digital Metamorphosis). As 2019 begins, both markets face political headwinds with the partial US government shutdown and Brexit. Longer term, the question remains – is the larger pool of investable assets in the US merely a siren song for small and mid-sized UK/EU-based investment managers, or is tapping the US actually feasible for those firms?
We will address three broad categories of factors that investment managers may consider as impediments to crossing the Atlantic: the regulatory environment, asset gathering effort, and costs. Each of these create reasonably high barriers to entry and certainly require much consideration. Our clients and business associates in London and Paris have expressed, and we have seen, that with the right plan and partners, all of these factors are eminently controllable and need not be the impediment they may appear to be on the surface.
For a firm that has never done business in the US, it may be obvious that the US regulatory scheme differs in material ways from those in the UK/EU. However, most US investment regulation is at the federal level, reducing the number of political jurisdictions that materially impact a manager’s business operation as compared to the UK/EU. We have heard multiple times that, once familiar with the US regulatory scheme, it is in some ways easier for a manager to handle. For those that do not know, a manager of a US registered fund does not need to be domiciled in the US, but must register with the US regulator (the SEC).
That may be well and good, you say, but how do we know what we have to do? Of course, you could address that by adding staff either located in the US or that are familiar with the US, but that could be a considerable fixed cost before any revenue has started. Fortunately, there are many compliance and law firms that are familiar with all of the jurisdictions in which you may operate and who can help manage this risk. In addition, the role of the fund administrator in the US differs somewhat from our UK/EU brethren, and the administrator may also provide significant and cost-effective assistance.
Asset Gathering Efforts
We could perhaps have led with this topic, as it is at least one of, if not the primary goal, of your firm’s efforts. Despite the attractive size of the US market you are likely wondering how much effort it will take to gather assets and how could you reasonably do so. First and foremost, we won’t mislead you by claiming that it is easy. However, it may not be the insurmountable barrier that you assume it is. The US market is likely more diverse than that to which you are accustomed, and particularly smaller pension and endowment funds may have both the appetite and flexibility to invest in less well known managers, especially those that are less correlated with traditional US product offerings. That is just one of many US market segments that may be appropriate for your strategy.
So, it’s great that there are opportunities in the US, you say, but how do we access those opportunities? Sales staff are notoriously expensive, and that difficulty could be compounded by the fact your firm doesn’t currently have a physical presence in the US. The same approach we suggested to address the regulatory burden (selecting a cost-effective partner) may work well for asset gathering, too. There are reputable marketing firms that can assist you with many phases of this effort, including helping you craft your story to target the appropriate part of the market, support digital information sharing and lead development, and meet with leads and close sales on your behalf. During the early years, trips to key US locations two or three times a year by your senior portfolio managers may be sufficient to supplement the effort of the US partner, along with webinars and other virtual ways to expand your presence.
If you can surmount the regulatory and asset gathering hurdles, you likely wonder whether the costs of extending your business across the Atlantic outweigh a reasonable return. Again, without appropriate attention and assistance, they could, but that is not by any stretch a necessary outcome. Careful planning and strategy development at the outset can offset part of this risk, as can attention to execution of the plan over time. An investment strategy that is not overly complex could break even as a business proposition at between $75 and $100 million USD in a registered fund, and perhaps half that amount as a private fund, which while less expensive may not be as broadly distributable.
In our experience, the managers who are most likely to succeed are those that consider something like entering the US market as a new business, and plan and resource that effort appropriately, while those who approach it as a hobby, may be displeased with the result. As we discussed, there are cost-effective and experienced partner firms that can help you address many of the risks you face in tapping the US market, and while it does require attention to both planning and execution, the opportunity is not limited to just the largest investment managers. In fact, some US market segments may be more welcoming to relatively unknown and emerging managers.
Even an adventurer is unlikely to proceed on a journey without a GPS or map, and planning and entering the US needn’t be an adventure for your firm. For twenty years the professionals at Ultimus have helped investment managers understand the steps needed at every stage of their fund journey, and we would be delighted to speak with you as you consider this opportunity for your firm.