Make Sure What Is Special Shines Through
When reaching out to potential limited partners
“We look to buy companies trading at material premiums to intrinsic value based on borrowed conviction from things we read on Fintwit in the last 24 hours”
The above is an excerpt from…no manager pitchbook, ever!
So why do people feel it is useful to write out obvious, generic value-investing soundbites? Ok, maybe it is worthwhile to state the obvious a little bit if you are trying to start from first principles and build up, but you need to do a lot more than that to get anyone interested in your fund. You need to spend the precious attention of your reader to highlight what is special or unusual about what you do.
The purpose of this essay is to share some simple suggestions for investment firms who reach out to potential limited partners (LPs) in search of capital, based on my own experience as a backer of emerging managers. Many emerging managers seem to learn the skill of presenting themselves to LPs by speaking to more experienced people in their network. But for those without extensive connections in the industry, I am writing some thoughts out in order to hopefully help overcome the clubby, insider-biased nature of the industry, and help increase the likelihood that meritorious but less connected people get funded.
First, put yourself in the shoes of whoever you are reaching out to. The key question is: As the receiver, what would you want to know about the fund in order to make an initial decision about whether it might be a fit? In most cases, the person reading your email a) gets a lot of pitches b) doesn’t have a lot of time. If you send them something generic and high level, and there is no evidence at all of anything special or potentially interesting, they are not likely to spend time on it. That is certainly true for us. (Sidebar — because it kills us that we can’t engage with every emerging manager gutsy enough to reach out, we created this website www.emergingmanagers.org to publicly collect information that is useful to emerging manager stockpickers).
In case you find it hard to empathize with what an allocator would be looking for, here are some thoughts about what our team is looking to get from initial materials. We want to know about the background of the key people, what skills they have developed, why they are suited to this, and why they are doing this. We want to understand what is unusual about the people and their investment approach. What is special, or has the potential to be special? What are you hoping to build? What is your vision?
One question to ask yourself is: can the reader learn something valuable by reading what you wrote? Can you teach or share something that is useful to them even if the fund isn’t a fit? The reader shouldn’t have to read everything you write in order to become interested, but you should aim to write something interesting enough that they will want to read it all. I am very happy to read a 20 page letter or memo if it is interesting and insightful. My job is basically to learn and become a better investor, after all — if you can teach me something from the get-go, that is a very strong signal to me. If you are not yet at a point where you can put something compelling together that someone in our position would be excited to read, you might not be ready to reach out to potential LPs yet.
This doesn’t mean you have to be an amazing writer or communicator. There are lots of ways to demonstrate you are a good investor. Frederik (@neckarvalue on Twitter) wrote an excellent piece on the challenges of being an emerging manager, and one of the powerful concepts was the idea of “show not tell.” There are lots of ways to do it, even without an extensive track record. Can you show that you have great investment ideas or demonstrate unusual insight or research? Can you demonstrate an unusual skillset or expertise that is valuable? (Frederik’s post here: https://neckar.substack.com/p/attempting-the-impossible). Or maybe you aren’t great at writing stock pitches or research, but you can show that years ago you were quietly buying the stocks that people are raving about on Twitter today at much higher valuations.
My last bit of advice is more tailored to the people who are really trying to become world class, not just aiming for a sustainable fund that pays the bills. Often, the best emerging managers we meet think about their introductory communications differently than most. They are not aiming to convince people to invest, but looking to communicate what they would want to know if they were on the other side of the table in order to know if it is a fit. Often these communications actually highlight unconventional or unpopular aspects of what they do upfront. For example, if you are only ever going to be a one-person shop, or if you have no problem with extreme volatility, best to make that clear upfront. In that example, you will cause people like MIT to be more interested, and someone who fears those things less so. That is a great way to screen for fit. Convincing someone to invest who is not a fit can end badly, and it can cause you to spend a lot of time on marketing that is not useful. A “no” is not the end of the world! If you are doing something unconventional and worthy, you will hear “no” a lot even if it is really great. (Or perhaps, I would argue that the more interesting and unusual what you are doing is, the more likely it is you will be told “no” a lot.). Of course, for many people, this concept will be a little scary. The other risk with this approach is that you may want to make sure you give people a chance to see what is special, before you hit them with what may be controversial or unpopular.
To sum it all up, if you can 1) showcase what is special 2) also share what may be unpopular 3) do both those things in the right proportions and 4) do it in a relatively concise document, you are well on your way to find great LPs who are a perfect fit.
If you want to learn more about MITIMCo’s emerging manager activities, please visit www.mitimco.org/emerging-managers. I can personally be reached at joel_cohen@mitimco.mit.edu. A collection of resources for emerging manager stockpickers can be found here: https://emergingmanagers.org/
Postscript:
If you are a passionate investor but you feel you aren’t ready to start a fund, have you considered whether applying for the Global Investor role on our team might be a very good idea? MITIMCo is a great home for passionate investors and an incredible platform to learn about investing, because we spend all our time with great investors across the world.
Learn more at: https://mitimco.org/global-investor/
Thanks to my colleague Emma Somers-Roy for suggesting the topic of this essay as well as reading early drafts
