COO Connect Editorial: Interview with Chris Greer, global head of capital introductions at Citi
Being a start-up is never easy, particularly in this tough and ruthless capital raising environment. According to a report by Citi Prime Finance, investors allocated $5.6 billion into 352 early stage managers bringing the total capital allocated into start-ups since 2009 to $12.4 billion. Funds of hedge funds (FoHFs) were the biggest enthusiasts for early stage managers and accounted for 70% of Citi’s respondents. Private banks, endowments and wealth offices are also making early stage investments and comprised ¼ of those polled. COO Connect Editorial speaks to Chris Greer, global head of capital introductions at Citi, about the report and the trends he sees for 2012.
COO: What is your take on the $5.6 billion figure? Are you happy or disappointed?
Greer: The figure is telling as it shows how challenging it is for early stage managers to attract capital in this environment. Assets are flowing into hedge funds – however, as asset sizes have grown and investors have become more institutionalised, they are allocating to the larger managers which impacts day one firms. A lot of pension funds and sovereign wealth funds are moving into alternatives. However, these institutions have strict risk criteria, concentration limits and large ticket sizes – therefore, their requirements lead them to larger shops.
COO: FoHFs are the biggest enthusiasts for early stage managers – why is this?
Greer: Historically FoHFs were access vehicles. They offered investors access to big managers who were difficult to access or closed to new investors. Since 2008, FoHFs have realigned their businesses. Many are focused on consultancy, portfolio construction and/or finding high quality early stage managers for their investors. FoHFs have quality research and operational due diligence, and have excellent networks in the alternatives space.
COO: The survey shows US investors embrace hedge funds more than their counterparts in EMEA and APAC. Why is this?
Greer: Many US institutions have been allocating to hedge funds for more than decade now whereas many institutions within APAC, for example, are only just entering the market. While long/short equity remains popular, a lot of US and EMEA investors go for credit and event driven funds whereas APAC institutions go for multi-strategy. Multi-strategy managers can offer investors, especially those with fewer investment resources better diversification.
COO: Is there a distinct US bias in terms of investors going to US hedge funds?
Greer: It is certainly easier to raise assets in the US than it is elsewhere. A lot of US institutions, who are the main investors into hedge funds, have had their travel budgets slashed. The same applies to US managers. US Investors and managers tend to only travel abroad two or three times per year to see each other, which puts EMEA and APAC funds at a disadvantage.
COO: The survey revealed there is a lot of downward pressure on the 2% and 20% management and performance fee. Is this downward pressure detrimental to early stage managers given all of the regulatory and operational costs out there?
Greer: Having worked at a hedge fund prior to Citi, 1.5% and 15% can still be a lucrative fee level for an early stage manager. Additionally, more early stage managers are outsourcing parts of their business, shifting fixed costs into variable costs, which increases their overall margin as a small business.
To view the Citi Prime Finance survey follow this link. http://icg.citi.com/transactionservices/home/demo/tutorials29/Citi_DI_ES_v4/