Author: Arvind Agarwal, Founder & CEO - C4D Partners
Publication: Times of India
In the past few years, the image and understanding of a fund manager have undergone severe dramatization. The new-age fund manager bears a glamourous, larger-than-life, almost avant-garde persona. On a regular day, you will find a fund manager implementing a fund’s investment strategy, managing its investing activities, overseeing portfolio performance, managing analysts, conducting research, and making important investment decisions. Oftentimes, they also serve as directors on the companies because of their nuanced understanding of how a particular company functions and how can it continue to function while reaching new heights.
Today, with the proliferation of investment capital and opportunities, the lines between whom we consider an investor, a promoter, and a fund manager have blurred and become interdependent. This article will aim to highlight the profile of a fund manager, understand how the roles and responsibilities of investors, entrepreneurs, and fund managers differ, and more so explain what are some of the key challenges that fund managers face.
The bonds that tie fund managers, investors and promoters
There are several blurred lines when it comes to the roles and responsibilities of fund managers, investors and entrepreneurs. This is primarily because promoters can build businesses and invest in other businesses that are ripe with growth opportunities. Similarly, while investors generally fund portfolio investments, they could also be promoters of their own businesses. They could also have been erstwhile fund managers that have managed funds successfully. Lastly, fund managers work with both investors in identifying viable investment opportunities and also with promoters to help navigate the course of the business.
What ties the three stakeholders together, is the commitment towards identifying businesses that show promise, financing and reviewing company performance, and identifying strategies to help them scale. The confusion here brims when the fund manager is seen at times as an investor and at times as an entrepreneur. The relationship and perception change further when a promoter’s business becomes part of the fund portfolio designed by the fund manager and backed by an investor.
Fund managers as entrepreneurs and NOT investors
The perception of the fund manager has changed. Today, nobody addresses fund managers as fund managers. For many, “fund managers” are akin to investors despite just being the “Investment Manager.” To most people, the difference between the two doesn’t exist, but in reality, the two roles have stark differences. Surprisingly, fund managers are no different than entrepreneurs unless an institutional/corporate fund employs the manager. Just as promoters are answerable to their investors, fund managers are accountable to their shareholders and investors. Fund management is one of the toughest forms of entrepreneurship. This is because a fund manager has to live from fund to fund. They need specialized qualifications and experience to eventually grow into the role of a fund manager. To float their fund, fund managers need to maintain a credible and trustworthy track record. They need to be able to identify multiple promoters that have a vision and can build scalable businesses. They also need to liaison with investors who can trust their judgement.
Constant monitoring, evaluation, strategizing and appraisement of all the companies that they are associated with can prove to be a daunting task. The manager must possess the foresight to pre-empt possible crises, economic and financial challenges and identify solutions that can help pivot if required. A good fund manager is only as good as the success of their last fund’s performance. These roles and responsibilities are very similar to that of an entrepreneur, the only exception is that while a promoter is focused on the growth and development of one company; a fund manager is focused on the growth and development of all the companies that comprise his portfolio. Therefore, when it comes to a fund manager and an entrepreneur – they are essentially the same.
Understanding the complexities a fund manager addresses
Being a fund manager is like going on a new adventure that allows you to grow with every new business, promoter, and investor that you collaborate with. Yet, ironically, this itself is the biggest complexity that fund managers face. For example, an experienced fund manager has launched a fund that identifies a set of 10 extremely promising businesses. Investors, based on the manager’s track record and the vision of the promoters, have taken a leap of faith and invested in this fund. To have some skin in the game and ensure smooth operations, the fund manager also serves as a board of directors to all the companies. Owing to an economic crisis, one particular company within the set faces operational and financial challenges. As a director, any impact on the portfolio company has a direct ramification to manager’s track record and CIBIL score. This, in turn, has a domino effect on all the other companies within their portfolio wherein the manager serves as a director. They are also accountable to the investors.
Here, the fund manager is left with no choice but to step down as director in an attempt to safeguard the rest of their portfolio companies. Although, the promoter may feel as though the fund manager is bailing as the going gets tough. Meanwhile, investors can transfer the contract to another entity if the manager is not performing within the prescribed guidelines. In such a scenario, the manager is left with no funds, the only source of income for the entity. They retain partial rights to the upside that the current portfolio can create in the future. But a first-time fund manager can’t have another income source or fund in the first five years of the fund life. At the end of five years, if the manager has not achieved a few exits in the portfolio, raising another fund is impossible. Their track record is paramount for the new venture to raise money from investors. Any impact, positive or negative, has a direct correlated effect on the fund performance. If the damage is severe, the fund manager is at the risk of not only losing the portfolio companies but also, losing the chance to build their next fund.
The complexities of investing, building and managing a fund and running an enterprise are incredible. What makes the journey fulfilling and rewarding is the camaraderie all stakeholders share. For all the functions to operate smoothly, it is imperative that all stakeholders are cognizant of each other’s roles and responsibilities. Sincere and open conversations can help build transparency and trust among the fund managers, investors, and promoters. For any investment, fund, or business to thrive – the three stakeholders play an intrinsic role. By understanding each other’s areas of strengths and challenges, they can collectively identify solutions that serve as a win-win situation for all.