Common Pitfalls of Cap Intro for Emerging Managers

One of the most common questions we get from emerging managers at Repool is about capital introduction services, or, as it’s more commonly referred to in the industry, “cap intro.”  Across the dozens of funds we’ve launched, the more still that we serve as standalone admin for, and the many, many funds unrelated to Repool that we’ve spoken with at various conferences, events, and from past lives from our executive teams’ roles at previous leading fund administrators, we believe we have a credible and strong point of view on the matter that is worth sharing with other emerging managers.

If you are an emerging manager – and even if you are part of the team of a billion-dollar asset manager – you may be wondering about questions like:

• “Is cap intro worth it? “Is it actually helpful?” 
• “When is my fund ready for cap intro?”
• “How can I get the most out of cap intro?”

Sometimes, we also run into emerging managers who are already actively engaged with cap intro teams and are relying (or planning to be) upon them to build their initial capital base. In this article, we’ll quickly (i) cover what cap intro is and then focus on (ii) who exactly it’s suitable for and, lastly, (iii) provide some general thoughts and suggestions on how we think emerging managers should think about cap intro.

Capital introduction services connect prospective fund allocators and hedge fund managers. Many prime brokers, investment banks, and broker-dealers have a cap intro team; boutique cap intro firms run on a standalone basis with capital introduction as their sole business.

The value of capital introduction is the breadth and quality of the allocator base and the quick access a strong cap intro network can provide for an emerging manager—or any private fund manager. Historically, this was a relatively boutique service and was highly influential in seeding and growing many name-brand funds, especially in pre-internet and nascent internet times when broadly finding awareness as a fund manager was challenging.

With hedge fund fundraising being arguably the number one priority for managers (following strong strategy execution) and generally a challenging endeavor, the promise of potential fast and significant capital and a wide network of deep-pocketed allocators is extremely alluring to many managers.  

For new managers, this is often a selling point made by counterparties, such as prime brokerages, who want your trading business.  In order to secure it, they will often talk about how their cap intro program is stronger, better, differentiated, etc, from that of other prime brokers, and the cap intro programs of many prime brokers is offered for free. 

Other times, cap intro teams may charge some sort of general recurring fee (e.g., $X,XXX per month) and/or take a placement-based rake.  Often, it’s both.  And it can be quite expensive, costing just as much as a fund’s entire back office operation.

But is it actually worth it?

 Who benefits from capital introductions?

Unfortunately, while cap intro can be extremely useful, as the industry has evolved and the number of funds on the street has proliferated significantly over time, cap intro generally has the issue that most matching marketplaces have—it’s extremely top-heavy, and generally, only the top few percentile of fund managers benefit, similar to matching behavior on dating apps.

Experienced Fund Managers

For starters, barring some sort of prior relationship (e.g., an allocator who built a direct relationship with a PM at an existing firm also backed by that same allocator), almost all allocators who participate in cap intro networks require a three (3) year track record to contemplate an investment.  

This immediately decimates the vast majority of prospective allocator-emerging manager possibilities.

Additionally, cap intro teams have two clients – the fund managers and the allocators.  It is important to consider the latter; a cap intro team would lose credibility quickly if it repeatedly put bad investment opportunities in front of its network of allocators, so in practice, the promise of a network of potential investors that is pitched is often never realized, as there are no guarantees that your fund will actually get in front of that such network of investors.  And that is a key danger of cap intro: there is no actual guaranteed output.

On the other hand, it is true that some allocators have “emerging manager” focused strategies and/or allocations set aside.  However, the range of fund sizes that an allocator considers an emerging manager is wide, and the number of funds that fit that criteria is fast; commonly, this includes asset managers up to hundreds of millions in capital.

Differentiated Fund Strategies

In practice, in our experience, the cap intro success stories we’ve heard tend to be from well-pedigreed (i.e., former team members from blue-chip firms or other funds) and are – as alluded to above – already well into their operations, with several years of track record.  To the extent we’ve seen truly fresh funds (sub three (3) years) find success, it’s often in relatively differentiated strategies (e.g., intriguing derivatives or uncommon assets) that help an allocator fulfill net new exposure and non-correlation goals relative to their existing portfolio of allocations. It is rare, then, unfortunately, for us to have heard of success for managers with some or all of the following attributes:

• Track record of less than two (2) years
• Highly common strategies with anything other than top decile performance (e.g. long-biased equity/option funds that don’t have top tier shape and low beta)
• Non-traditional backgrounds (e.g., retail, adjacent professional finance)

To get anything from cap intro programs other than, ironically, additional expenses to the fund that drag performance down further, with no additional capital to show for it. As such, while we have clients for whom we think cap intro is suitable, and we think cap intro can be an extremely useful tool, especially as a fund matures, we generally do not advise our clients to consider cap intro programs or to at least go into cap intro with extremely low expectations.

A particularly tough situation we’d call out, in particular, is managers who have a goal for their launch or initial twelve to twenty-four (12-24) months of operating that is reliant upon cap intro.  

We commonly run into folks who have aspirations to acquire $25-100m in capital with less than 25% of that secured and whose plan to fill the gap is something along the lines of “but I’m engaging [insert cap intro team(s) here], and that’s how I’ll get to my goal.”  We have essentially never seen this pan out for anyone.

At a recent reputation-and-pedigreed conference for emerging managers, we attended in New York in Q2 of 2024, cap intro was an agenda topic in particular. We heard tale after tale of managers with blue-chip backgrounds, strong track records, and existing capital bases bemoan cap intro’s efficacy. And those are amongst the strongest emerging managers!

Our number one suggestion for fund managers is to plan their future, assuming that cap intro will not factor in at all until year three (3) at the absolute earliest, and ideally, have a viable plan for growth that does not involve cap intro at all. In other words, the frank reality is that any fund manager whose plan to achieve their goals requires cap intro is likely to fail in most situations—not all, but most.

Strong Investment Record

Fund managers should instead focus on what they can control and what will generally set them up for fundraising success – strong execution and refinement of their investment strategy as they build their initial track record.  At the end of the day, allocators are ruthlessly and rationally seeking the absolute best investment opportunities in the market, and there are quite literally thousands of emerging managers and hundreds more every year.  No matter how shiny the pitch deck or how prestigious the cap intro desk is, ultimately, nothing will cause an undesirable or mediocre track record to suddenly become appealing.

Cap intro can be useful as a means to test your fundraising abilities against a highly sophisticated investor base, to refine your pitch, and to learn about what allocators are on the lookout for, but whether that’s worth paying thousands of dollars per year for is a different question. If you have cap intro or similar opportunities that are low cost in your early years of operation as an emerging manager, we think it’s a worthwhile and useful endeavor that is not particularly time-costly to go through, but we aren’t convinced that it’s worth it otherwise. 

506(c) offering

Instead, it may be worth considering general solicitation offering strategies, primarily vis a vis operating your fund’s offering as a 506(c) private placement safe harbor instead of the more historically common 506(b), wherein no general solicitation is required.  

This has some tradeoffs, and some allocators are averse to proving their accreditation (even when they are more than comfortably accredited), but for many managers, the ability to generally solicit will yield stronger results than cap intro by virtue of getting in front of many non-traditional allocators, who are often less discerning and/or have much fewer private fund investment opportunities – in other words, instead of being a tiny fish in a giant ocean, you can be a larger fish in a smaller pond.  

506(c) offerings are increasingly popular, and easier than ever to facilitate, with digital service providers making accreditation verification simpler and easier than ever for prospective investors to complete.  Mandatory plug – Repool is one of them, and our elegant investor onboarding solutions can be structured to provide 506(c) compliant verification.

Investor Networking Events

Lastly, fund managers should also consider attending investor network events – ideally low cost/cost-proportional to their fund size – and networking hard in person with other managers, providers, and allocators at such conferences, and then leap-frogging off those relationships to build new ones and cultivating all of them as much as possible.  

The value of multi-year nurtured relationships built on trust, communication, and respect will almost always yield stronger fruit than cold intros to allocators who can essentially “swipe left or right” on faceless fund managers while seeking specific allocations and/or the absolute best on-paper fund performance metrics.

 Raising capital is tough, and while sometimes useful, cap intro is not a magic bullet – far from it.  Plan for a fund that can succeed without it.