Starting the Business

Prior to making the leap to starting a new business and committing personal capital, the “emerging” manager needs to assess the opportunity fully. As with any new business venture, the first thing to do is to draw up a business plan/strategy. It will act as a benchmark through the process, even if the manager is not seeking external capital for the business.

The business plan will, at a minimum, help clarify thinking and will assist in communicating the plans to potential investors, professional advisers, regulators and service providers to the fund.

Business case

• Why is the business being established?
• Is the manager building a business or simply managing one successful product?
• What are the manager’s longer term aspirations?
• What are the fundamentals of why this business should succeed? What are its essential and distinct services?
• Does it rely on the reputation of individuals?
• Does it rely on a distinct investment methodology?
• What is the likely demand now and in the future for this service?
• How will the manager make its return? Does the manager anticipate an exit value?
• What is the target market which must be accessed and won in order to survive, let alone excel?
• What are the key drivers of profitability and how are these controlled?

Entry strategy

• Is a new, independent, stand-alone business required?
• Are there any existing management companies that could be bought?
• Has the manager considered the possibility of operating under the umbrella of an existing investment management house in a “hosting” arrangement?

Legal Structure and Ownership

• The corporate form is the most common – any reason not to use it?
• What should the share ownership structure and division between founder member(s) be?
• Where will the business entity be domiciled?
• What personal assets are to be invested?
• Does the manager have any cushion to meet any further calls for capital resources?
• Will the manager require external finance for the business?
• If external finance is required will equity be offered and under what terms?
• Will it be necessary to provide financial guarantees in addition to the purchase of equity?
• Will key employees be offered equity either now or in the future?
• Will non-executive directors have a stake?
• Is an employee share trust contemplated?
• What are the tax implications of the method of holding shares?

Product(s) and Services

• What is the manager’s proposed investment strategy?
• What types of investments will be dealt in?
• Will the investment management be discretionary or non-discretionary?
• Will the manager enter into any soft commission arrangements?
• The initial fund is the key product – are there plans for others?
• When does the manager want to launch the fund? Is there a date by which it must be launched?

Operations

• What are the plans for the following and what factors drive their decision:
• Offices and location
• Equipment
• Systems
• Electronic data sources
• Research sources
• What staff will the manager start with? Will staff numbers increase?
• What activities will be delegated/outsourced?
• What services will the manager expect the premises to include and what will the manager need to arrange, eg. Secretarial/computer support
• Who will be responsible for administration, accounting, payroll and compliance?
• What staff packages will be offered, eg. Pensions, bonuses, holidays?
• Who will write and maintain the operating procedures?
• How will absences of investment management people be managed?
• On whom is the business critically dependent (including the manager)? Has the manager considered key people insurance?

Service Providers

• Has the manager considered the range of providers it will need to engage for the fund?
• Does the manager have a clear idea of what it will be asking them to do?
• Does the manager understand the constraints under which they operate?
• Is the manager aware of how its obligations and those of the respective service providers are divided in relation to the fund?

Marketing and distribution

• Who are the target investors?
• How is the manager to access them?
• What distribution channels will be used? Will the manager use a major investment bank or broker to market the fund, or is it planned to go it alone? What calculations of the trade-offs between these two have been made?
• How quickly must a given level of funds under management be achieved, and are these limits to what can be managed effectively?
• How diversified is it intended for the investor base to be?
• What will happen if significantly less than expected is raised?
• What plans have been made for on-going communications with investors?
• What view has been taken on branding in the business and the fund it will manage? Does the manager want its business name highlighted; does the manager want it personalised?
• How will public enquiries be managed?
• Has the manager addressed regulatory issues relating to the marketing of the fund?
• Will the manager market products other than its own?

Regulation and compliance

• What regulatory requirements does the manager have to meet – for both the fund and the management company?
• What activities will the manager be permitted to carry out?
• Will the manager be able to maintain the levels of capital required by the regulators?
• Who will be compliance officer?
• What compliance monitoring arrangements have been considered?
• Who will be the auditors?
• Does the manager understand companies office filing requirements and statutory obligations of directors of the business?

Financial performance

• What are the 3-5 year projections?
• What will the basis of fee income be? What will the market bear for this type of investment management? How sustainable is that level of fee?
• Does the manager want to charge a performance fee? Have the different bases for calculating it been addressed? What are the market norms?

Risk factors

• Have the principal risks of the business been addressed?
• Have they been weighted?
• How is it proposed to manage each?
• Are there fallback plans for the business in the event that market conditions turn unfavourable to the investment strategies?