When I talked to family office investors for my recent book, assets under management was an important aspect they considered when evaluating a fund. Assets under management is not necessarily an indication of how a fund might perform. We have all heard the stories of small private equity funds generating huge returns with only a few million dollars in seed capital from friends and family. Conversely, we’ve seen some of the largest private equity firms rack up huge losses on poor investments. Still, a fund’s assets under management (AUM) is an important piece of information to many investors because it gives the investor a sense of how large the fund is, how many other investors have trusted the fund with their capital and the fund’s financial stability.
For a fund with a low level of AUM, the typical concern among investors is that the manager will be motivated to assume exceptionally high levels of risk in order to achieve superior returns and attract new investors. These funds also may not be able to afford the latest data, research, analysis or talented executives and risk management professionals and other expenses that become more feasible with a steady stream of revenue coming in from the management fees on a high-AUM fund. For funds will several billions of dollars under management, another fear grows among investors, that the management team is not motivated to achieve high returns and is content risking little and “getting fat” off the management fees, as one family office executive put it to me.
Family offices typically told me in my interviews that they wanted to wait for a fund to reach a certain AUM level before investing so as not to suffer unnecessary losses before a fund has proven itself. As Lukas Doerig of Marcuard Family Office, a leading global family office, explained to me, “We do not need to be the first soldier on the beach; it’s just not necessary.” That sums up the mentality of many family offices who many times go to exceptional lengths to protect their clients from risk, but not all. Some family offices look to capture the potential upside of an emerging fund manager, especially the often lower fees and superior attention to investors that an emerging manager might provide. Investors also take into account the management team’s prior experience, so a management team that worked at KKR before opening their own fund will likely have an easier time convincing investors to invest.
The bottom line is that many investors do pay close attention to a fund’s assets under management, but it is certainly not the entirety of their fund manager evaluation process and even institutional investors may make exceptions for exceptional managers.
You can read more about how investors evaluate fund managers in my new book, The Family Office Book: Investing Capital for the Ultra-Affluent (Wiley Finance).