CES Part 6: The Perfect Pitchbook
Video by: Richey May, Sep 21, 2021
A high-quality pitch book is a critical part of a capital raising strategy. This part of the Capital Education Series features ImageArb as they talk through what it takes for fund managers to have The Perfect Pitchbook in a short video. When putting together a pitch book, they recommend communicating ones value proposition or story in an accurate way that casts them and their strategy in the most attractive way; defining their market and problem; framing their universe of securities; detailing their decision-making process; showcasing strengths; discussing portfolio holdings, risk management, performance track record; sharing terms/service providers; along with designing professionally without overspending. Tune in above to learn more.
For any questions regarding these topics, reach out to Steve Vlasak.
You can see part 1 of The Perfect Pitchbook here.
Megan: Good afternoon. We are thrilled to be here today to discuss the importance of marketing collateral in asset raising. My name is Megan Nicholson and I’m a partner with ImageArb a communications consulting and graphic design firm that focuses solely on the investment management industry.
We work with investment managers and only investment managers to enhance investor communications. We have experience with a wide variety of structures and strategies, from hedge funds and private equity funds to family offices and public funds, and have worked with clients all over the world. Most of our clients are here in the U.S.. I’m joined today by my partner and founder Blayn Smith. Let’s dive right in.
Blayn: Hello, everyone, and thank you for joining us. Before I started ImageArb, I raised capital for hedge funds, so I’ve always believed in the importance of marketing collateral, a written presentation, a fact sheet, regular performance updates, quarterly letters. Those are all critical to gaining investor attention and retaining that attention and eventually getting an allocation. COVID has made this even more important. There are fewer in-person meetings, and lots of funds have close to new investment, so if a manager ever hopes to raise capital, he or she at minimum needs a written presentation (one that stands alone without benefit of a verbal presentation) a fact sheet, a communications program and a website presence with basic contact information.
Now we know that investment managers or investment managers for a reason. They want to manage money, not work on their Pitchbook. When I started this business ten years ago, there were still many managers who wanted to bypass the written presentation altogether in favor of in-person meetings or calls. They thought they could just cover it there. Thankfully, the industry has progressed, and most people seem to realize that a presentation is the minimum price of admission to managing other people’s money.
Now, if you’ve decided to manage a fund on your own for the first time, you may be overwhelmed. You don’t know where to start. I recently read an article written by a professor at Kellogg that highlighted research around professional networking. The researchers found that networking often made people feel “icky” and morally impure, and explored how individuals could get around that discomfort. The gist was that people approach their goals with either a promotion focus, meaning they think about their hopes and their aspirations, and how they can achieve a great outcome or through a prevention lens which centered on duty and obligation.
Approaching professional networking with the promotion focus alleviated awkwardness and increased their tendency to network. Similarly, you can be working on your story and your pitch book as either a chore or an opportunity. Sometimes that’s easier said than done, and we’re here to give you a few ideas to get started.
Megan: The pitch should communicate your value proposition or tell your story in a way that’s both accurate and casts you and your strategy in the most attractive way. Ask yourself, What problem do we solve? Answer this from the investors perspective. To do that, you first have to understand who the potential investor is given your strategy, background and capacity. Are you going to get the most traction with high net worth individuals, family offices, institutions? We’re currently working with a client who’s done a great job of defining both their market and the problem they address.
They are solely focused on raising capital from single and multi-family offices. They believe strongly that family offices like to rotate capital, meaning they like distributions and fairly rapid turnarounds from invested capital. Their strategy both leverages principle backgrounds and their network, and also allocates capital to opportunities with a shorter duration.
Blayn: Next, ask yourself, why is it hard to solve this problem? In other words, why can’t an investor just do this themselves or there hundreds or thousands of other managers out there who are doing what we do? A great example comes from the crypto world. If an investor sees value in allocating a small part of their portfolio to cryptocurrencies, buying and holding bitcoin isn’t exactly an insurmountable hurdle. However, diversifying across multiple cryptocurrencies and tokens is much more difficult. Tracking trends, signals and trading around positions is even more difficult. So if you’re launching a crypto fund that holds primarily Bitcoin and your returns and volatility are primarily attributable to Bitcoin, you’re going to have a different story to tell. And someone who actively manages a portfolio that rotates between Bitcoin, Ether and numerous other emerging digital assets, depending on sentiment overall. You want to showcase your strengths.
Megan: Now, let’s focus on drilling down your strategy. You’ll need to build out your presentation with several slides that answer the initial questions a sophisticated investor would ask. These typically include who you are, meaning your bios. Unless you’re part of an enormous firm pursuing a standard Arb strategy, your bios should be showcased. The reader wants to know who they’re investing with, especially if you’re a smaller fund or a fund that’s just getting started. So the smaller the fund or the earlier in your life cycle, the closer the bios should be to the front of your deck. Unless you have a particularly diverse team, I can go either way on whether to include headshots. It isn’t a make or break thing.
Blayn: Investment philosophy is your opportunity to share your beliefs and describe the why of your approach. Think about opinions here; elements that are not facts, but rather positions you’ve taken. So for example, do you invest in small caps because you think the market in small caps is still inefficient and you can get an informational edge? Or do you run a long, biased book because you think the market historically goes up and you want that exposure? This even goes for quantitative strategies.
One of our clients believes strongly that returns are primarily driven by inflections in the business cycle. So guess what? He has algorithms that signal inflections in the business cycle. You’ll want to cover your investment universe, what you will and will not invest in. Think of framing it in terms of securities, geographies and market caps.
Now your process, you’ll want to begin with idea generation, which does not apply for all strategies but applies for most of them. How do the most attractive ideas bubble to the top and catch your attention? This is especially important if you have a really big universe at a really small team. If there are two of you and you’ll invest opportunistically anywhere in the world across multiple asset classes, that’s a tall order. It may leave some potential investors rather skeptical of your ability to deliver. Acknowledge your resource constraints. You’ll want to cover criteria for an attractive investment in your research and analysis. So are you a long/short equity manager who meets with every single management team of every single position you hold? Or do you engage outside partners to help due diligence your opportunity?
And finally, you’ll want to focus on the decision to allocate capital. Does one portfolio manager make the call, or do you have to gain consensus across your entire team? Do you take a small position initially and then increase the position? Size is conviction increases? Or do you tend to put on a larger position all at once?
A personal pet peeve is not talking about your portfolio. So don’t make me guess what I’m buying if I’m on slide 15 of your deck and I have no idea how you’re going to express a thesis, then you haven’t done your job. Are you holding 15 to 20 names? 100. What’s your net exposure? What’s your geographic exposure? Is your portfolio thematic or is it a grouping of separate and distinct ideas? You’ll want to get this across right up front, as well as later on at the end of the capital allocation decision.
Communicate how you think about risk in the portfolio. Be honest with yourself and with your investor about how you’re going to avoid catastrophic drawdowns. Describe your post investment review process. Talk about your lost tolerance. Have you ever experienced drift?
If you have a track record, don’t hide it either. Reference your performance on the executive summary and provide more detail later in the book, or have your table of monthly returns and associated data appear in the first few slides. Amazingly, some managers think they can put their mediocre performance in the back, and the reader will be so wowed by their process and pedigree that they’ll ignore the results that will never happen. Own your performance.
Megan: And last but not least, let’s talk about your terms and service providers. Terms can be impactful, depending on the investor. Mock ups, for example, can be a deterrent, and choosing your service partners is important. Long gone are the days when investors expect all startup managers to have in-house operations and marketing teams.
Most investors who have experience investing in alternative asset managers understand the benefits of having outsourced service providers with reputable teams and operations. Ask others you trust in your specific space who they’ve use and had good experiences with prime brokerage teams. Typically, keep a list of service providers to provide to their clients that include everything from administrators to audit to outsourced CFOs and compliance officers.
We generally follow five rules of thumb when it comes to putting together a deck.
The first is the length. In general, we believe that the optimal length for a presentation is between 15 and 20 slides, excluding an appendix, if that’s needed. There are a few exceptions to the rule, particularly if a large component of your deck includes education.
Second is your contact information. You’d be surprised how many presentations we receive where the manager has neglected to include their contact information. If you’re lucky enough that someone likes your strategy and wants to pass it along to others, make sure your contact information is on the deck, both on the cover page and at the end.
Third, get your most important takeaways across in the first few slides. Too many managers dedicate the first part of their debt to market conditions rather than their strategy. This isn’t entirely appropriate.
Four, interpret your own charts and graphs. Give a sentence or two above a chart to help draw a conclusion for the reader. Don’t make them guess what your point is.
And fifth, try to achieve the right amount of information. You’re not going to avoid a due diligence process with this document. So don’t make it so dense that it’s unreadable. On the other hand, don’t fall prey to the idea that you may give away too much of your secret sauce and some will try to replicate your strategy.
Blayn: Let’s touch on design.
I get it, you’re spending a ton of money on your legal docs and your office space. And until you go out on your own, you don’t realize how much a bench system costs. That said, it’s a mistake to underestimate the importance of a professionally designed presentation. It does not have to be fancy. Nobody is going to allocate capital to your strategy because of a, well, Pitchbook esthetic or the cover you chose. But you do want to convey that you take yourself seriously. You do want to convey professionalism.
You want to visually organize important points so the reader can easily digest them. It doesn’t make sense to spend vast amounts of money to start a firm and launch a fund, but then your pitch book says, “My seventh grader helped me with this as part of their digital media project.” A few thousand dollars can really go a long way here.
A couple more rules of thumb for design. Some investors still like to print out the deck and take notes on it, so avoid lots of dark backgrounds and tons of photos. Those photos can also make the file size unwieldy. It’s not good for your pitch. Book to be eleven megs.
Megan: Let’s talk about your web presence. This has become increasingly important now that investors and managers may not have the chance to meet face to face. If someone searches for you online and you don’t have at least a simple splash page with your contact information appear at your domain, it looks somewhat minor league. If budget is an issue, you can always start with just the landing page and expand the site later if needed.
Many of our hedge fund clients stick with the landing page forever. Private equity firms tend to cover the following on sites at a minimum. First, their overall approach and criteria, which both defines their space of interest and helps owner operators self-select if they want to reach out directly. Second, your team bios. Third, your portfolio companies. Fourth, any news you’d like to share with potential investors or your current investors. And fifth contact information. Some will also publish white papers and fact sheets and include those as PDF options.
You can get much more involved, but this is a really great place to start. Hedge funds either stick with their splash pages or increasingly they launch a small website that also includes a tab for their team bios, a description of their firm’s strategy, not the fund and possibly their philosophy.
Blayn: Now, a few words of advice Make sure your site works on mobile. A responsive site is key, and except in rare cases, you really don’t need to spend a lot on hosting. There are many third parties that provide quality hosting in a very reasonable price. If you have your domain on GoDaddy, which many do, their WordPress hosting works well. HostGator is a good intermediate option, and WP Engine is one of the best WordPress hosting providers out there right now. You can spend $100, $200 a year and get exactly what you need.
Everything that we’ve discussed today is something that ImageArb can help you with. We provide verbal presentation coaching, visual identity creation, presentation content and design enhancement and website design and development, among other things.
What’s our philosophy? We believe that perfection is the enemy of excellence. It’s worth the time and money to do this right. But don’t obsess! Collateral lives and breathes, and you can add a slide or change your presentation six or twelve months down the road. If you find you’re getting the same question over and over and you need to add a little more information, try to achieve a balance of create a compelling presentation and driving yourself crazy with the implementation. You can’t be all things to all people. Be honest. Answer the question. Be clear. And don’t try to use esoteric words or gloss over a topic because you just don’t want to go there. You ultimately want sticky capital, and being honest and upfront promotes this outcome.
Humility is key to long term success in this business. One of my all-time favorite clients has an impressive 14-year track record and still approaches everything from stock picking to investor relations with a thoughtful, approachable attitude. He’s been very successful. He’s generated strong returns. He’s raised capital. He’s retained capital. He has a great pedigree. And he’s built a business that has withstood the test of time and multiple market cycles. His attitude communicates that he is open to continually learning whether that’s from his service providers or his LPIs.
We also believe it’s important to work with someone who can provide you with knowledgeable objectivity. Some funds have access to capital introductions or business consulting team at their prime broker. They can give you fantastic high level advice. Circulate your presentation to people in your circle, realize that you cannot implement 100% of feedback. If you ask five people to review your pitch book and four of them give you the same feedback, then you know you have a little more work to do. Our team at Image ARB specializes in helping managers put their best foot forward, and we would love to work with you.
Megan: Thank you so much for your time. We hope you found this helpful. Please reach out to us with any questions. You’ll find our contact information on the following slide. Have a great day.