Changes in Third Party Marketing – Chip Perkins Interview

September 23, 2010

Recently we had the opportunity to speak with Chip Perkins, Founder of Perkins Fund Marketing, a third party marketing services firm. He provided some perspective on how third party marketers are adding value in an industry that has changed significantly in the past couple years.

HFMA: Third party marketers have been described as independent sales and marketing firms with a Rolodex in the hedge fund industry. So, how does your firm go beyond that to – beyond simply having extensive contacts?

Perkins: Well, there’s a few ways that we do that. Certainly, we would expect that third party marketers live up to a bar in our industry, which would require all of them to be registered broker/dealers with FINRA and have licensed professionals, first and foremost.  And if people don’t have that, they probably shouldn’t consider themselves third party marketers, but finders.

What we offer to a manager is access to a team of professionals without incurring the cost associated with training, supporting and managing an internal marketing force.  You know, when you have a start-up fund or a young fund, they’re looking to use their meager assets to manage the portfolio. They don’t really have the time or the expertise to go out and find investors.  So what we do is give them the ability to devote their limited resources to portfolio management and let us worry about the sales and marketing efforts.

And investors expect us to bring high-quality, pre-screened opportunities to them so they feel their time is not wasted.  In our business, there are two people whose time can’t be wasted:  the manager and the investor.

HFMA: What makes an outstanding third party fund marketer?

Perkins: Well, I think it goes without saying that you need to be honest, and you need to have great integrity.  You need to have done the background checks and the work on the manager before you bring them to a potential investor.  In our business, you really have one thing.  You have your reputation. Hedge Fund Third Party Marketing

You may have years of experience, but it all comes together singly on your reputation and your ability to deliver good products to potential investors.  I think the other thing that makes an outstanding third party marketer is someone who understands the needs of the managers they represent, and works with the manager to establish realistic goals in terms of fund raising and overall business plan, for the type of investors they are looking for.

  • Do they want high-net-worth investors?
  • Do they want fund of funds?
  • Do they want endowments and foundations?

You’ve got to be able to manage the expectations of the fund manager, especially in an environment like this, and be able to articulate their strategy in such a way that potential investors fully understand what it is that the manager does prior to having a meeting with them.  So, what we try and do in every case is spend time on the phone or in person with potential investors prior to setting up a meeting for the manager so that a lot of the groundwork is already laid.

If we can’t add that value in the process, we would just be sending out a bunch of emails to somebody. There’s no value add.  Why should they pay us for that?  They can push the “send” button as easily as we can.

HFMA: A few months ago, there were some rumblings about either restrictions or an all-out ban on third party marketing. FINRA stepped in to provide some oversight for the industry.  What has that meant for marketers?

Perkins: Well, first of all, it certainly was a somewhat scary time. But one thing you have to understand is that FINRA has always provided regulatory oversight to third party marketers who were properly running their businesses.  That means that they are registered with FINRA, licensed, as we discussed earlier, so nothing’s really changed.

What’s happened is there have been a few bad apples that have come from some organizations that have gone outside and hooked up either with a broker/dealer and have put themselves out there as a third party marketer.  The difference is that these people often just sell to the organization from which they came, which caused a lot of problems.  It caused a lot of, shall we say, black eyes within organizations.

HFMA: And the result?

Perkins: It’s unfortunate, because many very good third party marketing organizations or placement agents have always been registered with FINRA and have stuck to the law and disclosed how they get paid, who pays them, etc.  To ban the group of people that are probably the most regulated organizations in the hedge fund business is ludicrous.  We add real value, and if you happen to look at the SEC website, the number of organizations, both state pension plans, endowments, and foundations that wrote in to the SEC saying that it’s crazy to ban third party marketing, you’d agree.

HFMA: Apparently, there’s some new pressures from two of the larger states as well, California and New York, that may be affecting third party marketers?

Perkins: New York says it’s eliminating third party marketers to work with managers that sell into the New York public pension market.  You know, I think it’s a mistake.

I think it’s unfortunate.  I think that they’re taking a broad brush to a small problem, and it’s an internal problem that they face.  I think there are a lot of minority managers that can’t afford to hire internal marketing staff. Minority managers and start-up managers historically have turned to third party marketers and placement agents to assist them.

If that door is closed, I don’t know how they can afford to find these pension mandates on their own.  They don’t have big staffs.  They’ve cut their staffs back, and the managers that we’re discussing can’t afford to hire internal people to access those people. It’s a bad cycle and, unfortunately, the pension plans are the ones that are going to be the most hurt by it.

HFMA: It’s a tumultuous time for the industry. What sort of changes do you see coming for the hedge fund industry, and how might it affect your business?Hedge Fund Third Party Marketing

Perkins: Well, one of things that affected our business over the past few years, besides manager performance, which, in some cases, has been very good, but in most cases in 2008, wasn’t too good, is that there was a flight to quantity, not necessarily always a flight to quality.

So small managers had a very difficult time over the last three years raising any assets. Whereas the big managers, even those that had lost considerable amount of money in 2008, topped off quite rapidly and have expanded their business back to their AUM highs or even beyond, which is fine, but it’s made the rest of the industry struggle.

The challenges going forward are that managers themselves are going to have to learn to be of institutional quality.  The business has changed.  It’s no longer two guys in an office and a couple of families walking in and saying, “Oh, you’re a really nice guy.  I like what you do.  Here’s $5 million.”

With the SEC coming along and saying that everybody needs to get registered, to afford to register and stay registered, to be able to afford to have an institutional-size shop, meaning, enough analysts to fit all the check boxes that everybody wants to do, you’re going to need to be $100 million. And not everybody’s going be able to do that. So there will be fewer funds, and I think performance on the high end will probably diminish over time.

HFMA: What do you look for in a hedge fund manager?

Perkins: We look for people that have what I call my three P’s.  I look for a manager who’s got great pedigree. I look for a manager who’s got great performance, and I look for a manager who’s got a personality. Because without a personality, it’s very difficult to tell your story.

So, if you have the three P’s and your performance is just as good as one of the big guys, you’re not going to get any money, because they’re going to give it to the big guy. Or they’re going to leave it with the big guy.  So, you’ve got to deliver over performance.  You’ve got to surround yourself with smart people.  You’ve got to be willing to invest in the infrastructure of your firm.  You’ve got to be willing to travel to go see potential investors.

The shoe’s on the other foot.  It used to be the investor was the one who was lining up at the door to get in with the hot manager.  Today, even hot managers are lining up at the doors of investors.

It’s a big change.

HFMA: What advice would you give someone who might want to break into the business of being a fund marketer? What sort of background would they need?

Perkins: Well, it’s never been harder to be in our business than it is right now. I’ve been in this business for 14 years.  My background was not in Wall Street.  It was in sales and marketing, and I got in at a time when one could do that.  I think if you’re looking to start up as a single-person entity or a small shop, it will be very difficult, because the kind of managers that you are going to attract are very small managers, guys with $5, $10, $15, $20 million.

The problem is there aren’t any buyers for those managers right now. So you’re going to have to bring in a seed person or an acceleration capital organization, and there isn’t going to be very much money left for the manager or for you, because those people require 25 percent plus the fees associated with the investment that they make.

So, at the end of the day, although you get capital, it’s costly. So it’s a very difficult business to break into right now.  It used to be very easy. You just got set up with a phone and a couple people you knew and you found a couple of managers you could represent. But it’s not that way anymore.

HFMA: So, would you suggest they try and work for an organization such as yours, one of the established fund marketers?

Perkins: That’s certainly a way to go. I don’t know a lot of people that are hiring in this environment. But, there are some big organizations out there.  Ours is one of them, comparatively.  I mean, we have 11 people, which doesn’t make us really very big on the grand scheme of things, but in our business, it makes us probably one of the top, four or five.

HFMA: Do you have any other comments or overall observations you’d like to add about third party marketing or the hedge fund industry in general?

Perkins: Yes. I think that an important thing for people to remember, especially on the investor side, is that third party marketers provide a service not only to the manager, but to the investors.

We do a lot of work with the manager to try to prevent anybody from presenting a potential fraud or a potential bad manager to people.  We scour the earth looking for quality people that we think are very good.  In our particular case — and I don’t think many other firms do this — we also invest with all the managers that we represent.

So, either my partner, Lisa Holzwarth, or myself or one of the employees in the firm, writes a check, and we also require a unanimous consent from all the salespeople when we take on a manager.  Everybody’s got to be willing to stand up and say, “Yes, I wanna go sell this guy,” and you know, if another marketer can’t make a statement like that, I don’t think they’ve done the work necessary to represent a manager.

I think our industry is here to stay.  I think the hedge fund business is an appropriate asset allocation vehicle for every portfolio. But people have to be willing to do the work to ensure that it’s the manager or the type of strategy that’s appropriate for their portfolio.

About Perkins Fund Marketing

Perkins Fund Marketing was created in 1997 in Southport, Connecticut, to provide comprehensive and effective marketing and sales in the alternative investment and long-only arenas.  Since the firm’s beginning, Perkins has raised assets in excess of 3.8 billion for its fund manager clients.

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