How Outsourcing Can Help Emerging Hedge Fund Managers Stay Focused on Managing Investments

There’s both good news and bad news for emerging hedge fund managers in a new report from Hedgeweek. First, the good news: Emerging managers have outperformed hedge funds for three consecutive years by an average of 4.8%.

Despite this, investors remain hesitant to invest in emerging managers who don’t have a strong industry reputation, solid capital base or structured team. These are the results of the latest Industry Report from Hedgeweek, The Next Generation: How emerging managers are adapting to the new hedge fund landscape.

Capturing Investors’ Attention

The Hedgeweek report makes it clear that emerging managers are struggling to capture the attention of hedge fund investors. More than eight out of 10 emerging managers (defined as those with less than $300 million in assets under management, or AUM, and fewer than five years of experience) say that attracting investor flows is their single biggest challenge during the initial launch process.

Despite this positive performance and their reputation at previous firms, nearly half (46%) of emerging managers said that it’s harder to raise capital now than it was a year ago. Two out of 10 consider a lack of an established track record and industry reputation to be major hurdles to raising capital.

One survey respondent put it this way: “You may have someone who has a ten-year track record in a particular strategy launching by themselves and even though you can follow the breadcrumbs of the track record, investors are still reluctant. It is frustrating,”

Caution Abounds

It’s not really surprising that after a rough start to this year, some hedge fund investors have decided to err on the side of caution. As another survey respondent put it, they’re looking to avoid the next “blow-up” and don’t want to take on what they perceive to be more risk with an emerging hedge fund manager. But while there may be more risk, emerging managers do offer value and the potential for strong returns, as the Hedgeweek report makes clear.

For example, emerging managers often bring innovation and a fresh perspective to hedge fund management, which can lead to novel approaches to their strategies. Complacency, on the other hand, can lead to sub-par returns. In the 2022 Alternative Investment Allocator Survey conducted by Seward & Kissel, more than 70% of investors said they have invested in managers founded under two years ago.

Investors tend to look for three key attributes in hedge fund managers:

  1. The manager’s return history and previous experience.
  2. Enough AUM to cover operating expenses and business risks to ensure that investors are getting the exposure and returns they expect.
  3. Proof of concept and faith in the manager’s investment process to give investors confidence that the firm will grow over time.

An Early Path to Institutionalization

According to one survey respondent, emerging hedge fund managers need a path to institutionalization early in their life cycle in order to meet investors’ expectations. “Investors aren’t waiting on the sidelines for new managers to produce a three-year track record,” he said. “They’re making allocations earlier in a fund’s lifecycle, and with earlier support comes accelerated expectations.”

One way emerging managers can stay focused on managing investments and attracting new investors is to outsource the fund’s finance and accounting functions to a third-party service provider. This will free up fund managers to spend more time focusing on alpha generation.

These services are sometimes referred to as Finance as a Service, or FaaS. FaaS goes beyond outsourced accounting to include a full suite of staff to support startup and launch efforts, payroll and HR support and financial records and planning services along with software that’s capable of managing the firm’s finance and accounting operations. In other words, FaaS is a one-stop financial and accounting services shop.

FaaS features flexible and transparent pricing, which makes it easy to forecast costs as the fund’s needs change in the future. This means that a FaaS provider charges based on the service offered, not by the hour or based on the level of staff assigned to the firm. As a result, hedge funds know exactly what they’re paying for and how their costs will rise or fall as they scale up or down.

Consero: The FaaS Specialists

Consero offers Finance as a Service to emerging hedge fund managers, PE/VC firms and their portfolio companies. If you would like to discuss the potential benefits of FaaS for your fund, please request a complimentary consultation

 

Startup Funding Continues to Fall: How FaaS Can Help Boost Efficiency and Lower Costs for Investor-Backed Startups

After peaking at the end of last year, venture capital funding in North America has started to decline. Total venture dollar volume for the quarter ended on December 31, 2021, was close to $100 billion, but this fell to about $63 billion at the end of this June, according to data compiled by Crunchbase. This was a decline of 27% from the end of March and 25% from a year earlier.

The funding downturn has been especially sharp in the technology, healthcare, software and life sciences industries. This has spilled over into private startup valuations. Investors have not been investing heavily in pre-IPO rounds, which has also contributed to the downturn.

Breaking Funding Down by Stages

The sharpest funding declines occurred in the late-stage and technology growth rounds. A total of $36 billion was invested into these growth rounds in the second quarter of this year, which was down 33% from the first quarter and 30% from a year earlier. This marked the lowest quarterly funding total at this stage since 2020.

Round counts, meanwhile, fell to 371, which was down 25% quarter-over-quarter and 27% year-over-year. Big late-stage financings were done despite cuts and contracting valuations at many unicorns.

Early-stage investing has seen less contraction than late stage. A total of $23 billion was invested in Series A and B startups in the second quarter of this year, which was down 15% from the first quarter and 17% from a year earlier. Round counts fell to 1,015, which was down 15% from the first quarter and 20% from a year earlier.

Seed-stage funding remained near historic highs in the second quarter, though it was down from its peak at the end of the first quarter. A total of $3.5 billion was invested in seed-stage companies in the second quarter of this year, which was down 30% from the record-setting first quarter and 6% from a year earlier. However, round counts fell to about 1,300, which was the lowest level in more than two years.

VC-backed Exits and Acquisitions

With regard to venture-backed exits, these are mostly coming from acquisitions. Acquirers bought VC-funded companies at a brisk clip, including several for more than $1 billion. While a few VC-funded companies made market debuts in the second quarter, the IPO window was mostly closed. 

As this data shows, the second quarter wasn’t great for VC-backed startups. Startups are facing more pressure to reduce burn and preserve cash reserves, especially given falling public market comps for unprofitable technology companies.

But there is a silver lining: Given the fact that the funding downturn has been much more pronounced at the late-stage growth rounds, investors seem to be more confident about the prospects for early-stage and seed-stage deals. These deals stand a better chance of reaching maturity under better market conditions.

Boost Efficiency and Lower Costs with FaaS

With the slowdown in venture capital funding, many companies are looking for areas where they can boost efficiency and lower costs. One way to accomplish this is to outsource the finance and accounting function using Finance as a Service, or FaaS. This approach goes beyond outsourced accounting to include:

  • A suite of remote and skilled finance & accounting staff
  • Well-documented processes with digital workflows
  • Cloud-based software that’s capable of managing the entire finance and accounting operation

Using the FaaS model can help PE and VC-backed businesses grow quickly while maintaining a low-cost finance and accounting function. FaaS offers flexible and transparent pricing, which makes it easy to forecast costs as a company’s needs change over time. The FaaS provider charges based on the services offered, not by the hour or based on the level of staff assigned.

In other words, you only pay for the finance and accounting functions you need, when you need them. As a result, you know exactly what you’re paying for and how your costs will change as you scale up or down.

Consero: The FaaS Specialists

Consero offers Finance as a Service to growing investor-backed businesses. Get an optimized finance and accounting function using FaaS and increase efficiency while reducing costs in the current tight finding environment. 

Contact us by requesting a complimentary consultation to discuss your situation in more detail.