Preface

Is your world a fund, Daddy?

- Rafe Hudson, aged 10

I am writing this book as a natural sister to my earlier book, Funds: Private Equity, Hedge and All Core Structures (which I will refer to as the 'funds book'). This book concerns the managers of the funds. The funds book proved popular with asset managers that use it as a structuring reference guide to their own funds or to check structures of funds different from their own, MBA and finance students, and more widely as part of training for managers, finance professionals, lawyers, and accountants.

This book sits alongside the funds book and examines the managers and their structures, as well as their day-to-day issues, hopes, and aspirations. As such, it is a little more anecdotal than the funds book and contains quotes and ideas from many managers and investors that I work with. The company that I work at - MJ Hudson - advises over 600 asset management groups and 200 institutional fund investors.

I also reference a number of lessons that I have learned (often the hard way) over more than 30 years (so far) in asset management. During this time, I have been a lawyer, asset manager, business builder, chief executive officer (CEO), chief investment officer (CIO), and chief compliance officer (CCO) - a wealth of experience to draw upon.

The funds book focused on alternative asset management. This book is broader and considers managers across all asset classes - although alternatives is more my zone. There is an emphasis in this book on creating and building management companies, as well as the current trend for mergers and acquisitions (M&A) to build scale in an effort to counter complexity, regulation, and multi-investor demand.

In the past, I worked within a fund managers' incubator at a bulge-bracket investment bank (Credit Suisse First Boston), and I also created a tech-incubator (Far Blue Ventures) which backed new IP-focused companies. I currently help others create new managers, such as Alpha Hawk (an emerging hedge manager incubator, where I am a co-CEO and MJ Hudson runs the infrastructure). Personally, I love new creations, and most of my career moves have involved starting something new. In this book I endeavour, therefore, to focus on the refreshing, the creative, and the new.

Starting an asset management company from scratch is always possible, although regulation has made it harder. I started one from scratch myself in 2000 and have helped many others start theirs. Creation is often the best fun. However, be aware that it might take several years of loss making. No doubt, your first plan will be too complex in its initial excitement and, for all your own joy, investors will want to wait and see. Do not be put off by increased regulatory requirements, but double your annual budget. Also, like any building project, double your first timescale estimates.

Spinning out a manager from a larger group is quicker. My top tip is to have your previous parent invest in the fund as a precursor, but not to invest in the manager, save with a call option in your favour, as this can put off new investors.

Ask yourself whether you genuinely have partners with whom you can establish a management company. If you think that you do, then be super clear, from the start, on what your strengths and weaknesses are. Also, each partner should commit hard cash to the venture in similar proportions and you should map out how the partnership will survive the first bad years. A fund manager 'seeder' is a group that invests in the management company. Seeders typically want 20% to 25% of the management company. Ensure there is a call option in your favour at an agreeable valuation. A cornerstone is an investor that cornerstones your fund. Such an investor will want a share of the performance of the fund and possibly a management fee break. Seeders and cornerstones can accelerate your business. The first investors are the hardest to close; everyone wants in once you are successful.

This book considers the ups and downs of the last ten years, as well as future-gazing to threats and opportunities of the next ten. The funds book came out during the immediate aftermath of the credit crisis (that I define as the period from mid-2007 to 2009, that saw the bankruptcy of Lehman Brothers and the collapse of Bear Stearns - to mention just two) and in the midst of the longer financial crisis (that I define herein as the period of negative to low growth from 2008 to 2013).

This book is also most timely, because it is set at the start of what I call 'the new era of asset management'. This new era is marked by a shift in the focus and energy of regulatory authorities onto the asset management industry, which have been distracted until now with their endeavours to remove the major systemic risk of modern-day capitalism - mass bank failure. In addition (as a Brit), we also find ourselves in interesting times with the United Kingdom (UK) winding up for its departure from the European Union (EU) in 2019 (perhaps!) and dealing with the inevitable fallout. The new era we find ourselves entering is also one of AuM scale or very deep niche skills. The middle is the valley of death. M&A in asset management is becoming prevalent. Regulation, increased substance, increased disclosure, and technology-led threats and opportunities are very much with us, and scale is helpful in managing these challenges.

This book spends some time on the regulators' new focus on industry practices, as well as the effects changing legislation will have on the UK, EU, and US - the three largest asset management blocs. Chapter 12, however, examines regional differences in asset management, with a particular focus on jurisdictions outside of these three blocs. Clearly, Asia is on a dramatic ascent in asset management.

I postponed writing this book to await 29 March 2019 - the planned date for the official departure of the UK from the EU (Brexit). At the time of writing, the date for Brexit is uncertain (but a second extension on the deadline has been agreed for 31 October 2019), and some words have now entered my swear-word vocabulary; such as 'longstop', 'extension', and 'red lines'. Still, the world spins on and the asset management community must continue to thrive and get on with the day job. Similarly, authors must finish books. Thus, in this book, I have assumed that the UK will 'Brexit' and leave the EU. That, in my own business, I have assumed from the date of the referendum result in 2016. Hence, I set up a regulated Luxembourg platform in 2017 in preparation for loss of EU financial passports. Also in this book, I have assumed that some sort of withdrawal agreement is signed and trade talks commence soon (or the UK stays in the EU customs union). Either way, I have written this book on the basis that at some point the UK loses the EU passports. More on the B-word later in the book.

The ongoing tussle between man and machine is another important backdrop to this book. Each side to the 'man versus machine' debate professes to have humanity's best interests at heart. Those supporting the use of robots argue that everyone's quality of life will vastly improve, whereas those that are sceptical of technology's rise claim that mass unemployment in an already wage-stagnant economy is a dangerous combination. This debate does not escape the boardrooms of asset managers as they look to cut costs, increase efficiencies, and stay relevant to the young.

So-called 'ESG' and 'impact' fund managers receive a heavy emphasis in this book, as rapidly growing key issues, as explained in Chapter 4.

This book does not examine the prior performance of different types of asset classes. Neither does it predict their future performance or make any detailed assessment of risk and return. Rather, it is a guide to all things fund manager - a mini-encyclopaedia to their structures, governance, regulation, taxation, technology, and, most especially, their challenges and opportunities.

Included in this book are some quotes from interviews that I have conducted with CEOs of asset managers to help me formulate a more immediate and relevant context for the technical aspects of the book. I have deliberately chosen CEOs from a range of asset classes, and all being founders of their company or strategy. This makes them all 'lively' and interesting. Their summary biographies are at the back of the book, and they are:

• Private Equity - Wol Kolade, CEO of Livingbridge, a UK-based private equity firm investing in growth and small to mid-cap, also with offices in the US and Australia.
• Hedge - Richard Novack, co-CEO of Alpha Hawk, a new multi-boutique hedge manager investing platform.
• Venture Capital - Alice Bentinck, MBE, general partner and co-founder of Entrepreneur First, a modern and widely acclaimed VC that is a business builder and start-up accelerator based in London.
• Listed manager - Tony Dalwood, CEO of London-listed Gresham House, focused on listed equity and alternatives.
• Social impact -Nigel Kershaw, OBE, Chairman of The Big Issue Group, the world's most widely circulated street newspaper.

To help with the navigation of this book, a short summary of each chapter is set out below.