Fund managers today face an uphill battle in distinguishing themselves within an increasingly competitive landscape, where a multitude of funds vie for a finite pool of LP capital. As the private markets evolve, the significance of brand differentiation, strategic digital engagement, and personalized outreach has never been more pronounced.

In our latest LP Perspective interview, we turn to Chris Schelling, Managing Director of Private Investments at Caprock and a seasoned investor with over 20 years of experience in the industry. Chris offers invaluable insights into the challenges and opportunities present in today’s fundraising environment.

About Christopher Schelling
Managing Director of Private Investments at Caprock.

Chris Schelling is an investor, advisor and published author. With degrees in psychology, business, and finance, Chris is an expert at incorporating insights from behavioral finance into investment decision making. During his 20+ year tenure in the investment industry building portfolios, mostly focused on alternatives, Chris has met with over 4,000 managers and allocated roughly $7 billion, generating top quartile to top decile returns across hedge funds, real assets, private credit, and private equity.

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The current state of the market & challenges for emerging managers

Emerging fund managers face unique hurdles in today's fundraising landscape, especially those at the beginning of their journey. You've indicated that it can be particularly challenging for first-time managers or those on their second or third funds.

What is your current assessment of the fundraising environment and what specific advice would you give to these emerging GPs to enhance their chances of fundraising success?

The fundraising environment is challenging for all private markets firms, but especially so for small and new managers. According to research I saw from Pitchbook, something on the order of 1% of all capital raised YTD across private markets has gone to funds sub-$200 million, which is the lowest number on record. So, it’s a difficult time in general, but orders of magnitude more so for emerging managers. Where I do see better uptake for fund ones is when the manager has a strong pedigree and track record in the same strategy at a prior organization, a team that has continuity together, solid returns and a differentiated story – think niche strategies, sector specialists (and the definition of sector is becoming more granular). My advice for new managers is to really work on the narrative and marketing collateral, invest in “institutionalizing” your business Day 1, and consider equity / economics for a large seed or anchor investor.
I also expect over the coming quarters that fund raising will pick back up across private markets, and allocators will get back to more normalized commitment pacing. So, in the relatively near term, that is good.
In the longer run, I think private markets are going to evolve into more of a spectrum, due to information availability and market efficiency. There will be increasing segments of the market – like Series D and E in VC and mega-cap buyouts – where pricing more closely and immediately tracks public market comparables. Data availability will increase in these areas, and market participation / user adoption will grow. Assets will grow most quickly here. However, these markets will become more volatile and excess returns will disappear.
On the other hand, smaller, nichier areas with fewer competitors, less capital availability and – importantly! – more information asymmetry will still be illiquid and offer both greater dispersion and persistence of returns, the breeding ground of alpha. Air pockets of capital will be where real investors seek opportunity. In short, go where others currently are not, but tread carefully.

Raising from the private wealth channel:

The landscape for fund managers is becoming increasingly nuanced, particularly when targeting different investor segments. Chris, your experience as an institutional allocator and your current focus on private investments for a multi-family office provide valuable insights into this dynamic.

What are some key differences GPs should be aware of when targeting the private wealth channel?

In some regards the wealth channel is similar to the institutional market. Allocators are searching for managers with a differentiated angle to value creation, strong returns that can be expected to persist who behave like good partners and stewards of capital. So, GPs need to demonstrate those big picture traits. However, the wealth channel is different in that the operational challenges and complexities of it often outweigh investment factors into the decision matrix. Whereas institutions have the luxury of focusing exclusively on returns relative to risk, wealth managers need to consider minimum check sizes, number of clients that can participate, resources required to execute and fund, tax consequences, etc. – all frictions that are material. To the extent that a manager wants to successfully access the retail channel, I highly recommend trying to accommodate these frictions as best you can.

Evolving Role of Data and Technology

The integration of data and technology is rapidly transforming the private markets. These tools can have a significant impact on LP/GP relationships.

As an allocator, how do you see the role of data and technology evolving in private markets, and how should GPs leverage this in managing their current and prospective LP relationships?

Data is still far from ubiquitous in private markets, which I would argue is why there is the opportunity for persistent excess returns. I mean, there is no reason why the owner of a private company owes the market financial information in their business. They are not public!

Information asymmetry is a precursor for persistent alpha. However, data availability is coming to private markets – whether that is pricing information on privately owned companies, fund manager return databases, tools that help parse legal documents and capital account statements. And I think what it means is that certain segments of private markets will ultimately become more liquid, more volatile and more efficient – and there will be less alpha available.

They will become more efficient beta markets, and I’d argue that is already happening in certain segments. I think for most GPs, where the market is at is producing standardized data templates for their LPs, and total transparency – at least with current and prospective LPs – is definitely where the market is today.

Content Distribution and LinkedIn

In an increasingly digital world, effective communication is essential for fund managers. With your sizable following of >3k followers on LinkedIn through Alternatively Speaking, I'd love to hear your thoughts on the best channels for GPs to engage with investors.

Do you think LinkedIn is one of the key channels for GPs to share their perspective, or are there other emerging platforms you think are key for content distribution?

I’m hardly an expert on the matter – I think I’ve done a poor job of actively curating and engaging a network. What I have done effectively is say what is on my mind, and I’ve found that that is the best way of engaging with people experiencing the same issues. In my case, that’s actually what I am trying to do – open a conversation with the right people.

My advice would be to be authentic, say what you think – don’t be afraid to poke the bear a little – obviously be professional, but followers are looking for people willing to speak truth as opposed to simply repeating tired talking points. I think GPs need to be willing to experiment a little, and produce collateral and content across various social media that resonates with their specific LPs.

Try videos, blogs, and just produce a lot of content until you find the right formula for you. Some people are LinkedIn content creators, and some are Twitter, and some are both, but that’s what makes a market! Find what works for you and your constituents.

Standing Out in a Crowded Market

With many managers vying for LP capital, differentiation is extremely important. You've met with over 4,000 managers, and you mentioned you receive 20-50 inbounds from managers a day.

What can brand builders and capital raisers in the private markets do (or not do) that would stand out to you nowadays?

Marketing and branding professionals will tell you to have an authentic narrative around who you are, what you do, and why it creates value. They will tell you to connect with your prospective investors and create personal relationships based on trust. And all of that is true, but people like me in my seat are trained to see through all of that.

I definitely want to work with someone I can trust, but I want that trust to be based on objective evidence of competency, and mutually beneficial exchange. And what I need to see is a competent team with demonstrated success in their strategy, adequate resources to continue to execute on that strategy, and alignment of interest with their limited partners.

Simply put, show me a good story, deep team, strong returns, and evidence of being good partners – sounds trite, but lots get kicked out right off the bat because they don’t have those things.

Bonus question

Thinking beyond the private markets, what is your all time favorite brand and why?

My all-time favorite brand – that is tricky. I often use firms like Blackstone or Goldman Sachs as examples of the “NY Yankees” of our industry, but maybe that is dating me at this point! And they are massive category killers that dominate their respective segments, which is great. I have enormous respect for all of them. But maybe I’ll share something that is smaller, more local and resonates perfectly with their target market.

There is a brewery in Austin called Twisted X, and they have a hazy IPA called McConauhaze, named tongue in cheek after the famous actor and Austin resident Matthew McConaughey. First of all, hazy IPAs and local craft brews are very popular in Austin, but McConauhaze references a cultural icon that is super relevant to Austin. The logo is even the University of Texas horns up hand gesture! It’s a perfect example of a hyper-local brand that is perfectly dialed into their respective market, and not trying to be everything to everybody. That approach resonates more with me nowadays.

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The LP Perspective: Fast Five with Christopher Schelling, Managing Director of Private Investments at Caprock