Successful International Distribution – Part 3
By Daniel T. Allen, CEO, Aliier
It Is All About Fear
Whenever someone starts something new, how they handle the process typically boils down to what particular type of fear is driving them. With international distribution some managers fear dismal failure. Their overriding focus is on what happens if they do not raise any AUM. Other managers fear enormous success. They fear that others will take advantage of them and they will somehow lose out. Bizarrely, I have found that a lot of managers fear both. Lastly, some managers simply fear the unknown. These fears are generally irrational, are typically driven by unrealistic expectations, and they hinder the ability to succeed.
Sure, opening a new international market is hard. It can be time-consuming, and costs are heavily weighted upfront. It will not happen overnight but, with patience and perseverance, it will almost certainly happen — at least at a level that pays for itself and, if there is solid success, it can dramatically change a firm’s trajectory. Putting it in perspective, at 100bps, a very small institutional allocation of just $25M produces $250,000 in new fees every year. The only question you really need to answer is — do you believe that your strategy is good enough to capture such an allocation. If the answer is yes, then go for it.
So why does failure occasionally occur? Usually, it is because the underlying dynamics for success change. For example, the manager experiences losses in performance due to market changes or there are key characteristics of the strategy that drift, hurting your chances especially with larger, more sophisticated investors. Occasionally, there is a regulatory change or a recession or some geo-political backdrop that hurts the effort. Most avoidably, it can occur when manager expectations are not managed and the distributor/manager relationship develops serious friction which, in my experience, is poison to the effort. If there is friction between you and your distribution team, work with your Responsible Entity partners to either replace the wholesaler or better yet, find a way to work it out.
Bottom line, yes, stuff sometimes happens. Control what you can. If you do your best with the strategy and you are willing to be flexible and you support your distribution team and the effort at large, then you have a very high probability of success.
The fear that others will make too much is not only unreasonable it is also unfair and self-defeating. Think about it, Econ 101: The value of anything is established by the alternative.
There is an old joke about a factory consultant that comes to mind. A factory has a key piece of equipment that breaks. It is costing the factory a million dollars a day to be out of production. Mechanic after mechanic is hired to fix the equipment but it is a complicated, customized piece of equipment and after two weeks no one can figure out how to repair the machine. After a lot of calls, there is one factory consultant identified as the guy who can absolutely fix the equipment. The CEO calls him and tells him on the phone, “I will pay whatever it takes to get it fixed. Just get it done!” When the consultant arrives, he strides confidently into the plant, past the waiting CEO, and crawls up on top of the broken machine. He fiddles around for a few minutes, then replaces a small piece, makes an adjustment, and tells the operator to start it up. The machine roars to life, even running smoother than ever. He hands the CEO his invoice for $50,000. The CEO becomes very angry and says, “I will not pay such an outrageous bill for 10 minutes of work!”
The consultant looks at the CEO and smiles. “You are not paying me for 10 minutes of work. You are paying me for a lifetime of knowledge that allows me to fix a machine costing you a million dollars a day in 10 minutes so you can get back to work. But, if you would like, I would be happy to put it back the way it was.” The CEO pays the consultant.
Every manager wants to think they will raise a billion in AUM in six months. Trust me, it will almost certainly not happen. But let’s assume for a moment that your distributor does do extremely well. If you find a distributor who can raise a lot of AUM for you, remember that your alternative was to NOT have that AUM. So, what is that new AUM worth to you? Your distributor wasn’t stopped on the street and handed money. Your distributor had the right contacts, knew the right people to see, and knew what to say to them to capture their interest. Perhaps your distributor knew of specific market needs that you filled. You didn’t have this knowledge. His lifetime of knowledge is why you retained him isn’t it? It isn’t what they get, it is what you get. Keep your hands in your own pocket.
Upside fear is based on the bizarre theory that you want someone to do their job, but just not to do it too well. Don’t begrudge someone being rewarded for doing exactly what you asked them to do!
Fear of Both
The most frustrating managers to work with are the ones who paradoxically fear both the downside and the upside simultaneously. Sadly, there are a lot of managers who seem to fall into this category. These managers are terrified that any time, or resources, they put into an international effort will be wasted, while at the same time they hold tightly onto the fear that if the effort is successful someone else will get too much. This category is very difficult to work with and we generally try to avoid these managers.
Fear of the Unknown
A few years ago, we had a manager who had been tapped for an AUD $200M allocation. All the work had been done, presentations made, and the only box left to tick was that the CIO wanted to meet the Portfolio Manager in person before funding the allocation. Unfortunately, the Portfolio Manager refused to fly to Australia from his home country. The idea of going to another country, spending so much time in the air, and being away from his computer screen for probably a week was too much disruption for him. In the end, he didn’t go, we lost the allocation, and we dropped him as a manager.
If you decide to do business internationally, you must accept that you will need to travel to your new international market at least 3-4 times a year. If there is a very large allocation opportunity, you may have to fly on relatively short notice. Firms with portfolio management teams seem to find this easier but if, for whatever reasons, you cannot bring yourself to be available to travel then international distribution may not be for you.
Reasonable fear about doing the right thing is understandable and it is a healthy part of making sound decisions, but unreasonable fear will hinder your success. Remember, the value of any action is established by the alternative to that action. Today, we all sometimes forget that risk is always a two-sided beast. You can expand your market footprint and assume the challenges that entails, or you can wait for others to move into your home market increasing competition and then deal with the challenges that entails. You can compete and pursue international AUM or you can stay at home and never capture that AUM. These are your real choices. You cannot, however, have it both ways.
Next installment: To Retainer or Not to Retainer
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