EM Pro Tips: Track Record

Starting a fund is a bold and exciting endeavor, but one of the critical challenges many aspiring fund managers face is leveraging their track record from a current or one or more previous employers. A track record is more than just a list of past achievements; it is a vital tool for attracting investors and establishing credibility. Given the recent challenges in fundraising where most of the capital is going to established players in the industry, a strong track record is generally the deciding factor in successfully raising capital.

Fund managers should start considering their track record early in their careers, ideally from the moment they begin a new role. This allows them to position themselves strategically for a future transition and provides an opportunity to negotiate key terms that will matter later. However, navigating the licensing of a track record can be complex, especially when intellectual property and confidentiality restrictions come into play. Here’s what fund managers need to know about licensing a track record and alternative solutions if licensing is not an option.

Licensing a Track Record

1. Understand Ownership
   The first step is determining who owns the track record. In most cases, an employer will claim ownership of any track record developed while working for them, as it is often considered a product of their resources and platform. Reviewing employment agreements is essential to understanding the specifics, particularly any restrictive covenants such as confidentiality obligations, intellectual property rights, non-competes and non-solicits.

2. Negotiate a License
   If the employer owns the track record, negotiating a license to use it may be possible. This is more likely to succeed if the departure is amicable and the new fund’s strategy does not directly compete with the former employer. Consider the following when negotiating:

   • Clearly define how the track record will be used, particularly in marketing documents, and be ready to provide the exact language that will be used along with the appropriate attributions, disclaimers, and acknowledgments, as this will likely be a key requirement.

   • Offer assurances that its use will not harm the former employer’s business, and be prepared to indemnify them against any potential loss.

   • Be ready to include attribution, disclaimers or other acknowledgments recognizing the former employer’s role in building the track record.

If Licensing Is Not Possible

When licensing a track record is not an option due to legal, practical or competitive reasons, alternative strategies can help build credibility and demonstrate expertise:

1. Highlight Previous Roles
   Even if the prior track record cannot be formally used, fund managers can emphasize their roles in managing funds, making investment decisions or developing strategies. Care must be taken to avoid misrepresenting contributions or violating any employment covenants from your prior employer.

2. Partner With a Former Employer
   In some cases, former employers may be open to collaboration. They might be willing to co-brand a portion of the new fund’s strategy or act as a seed investor, which could lend credibility to the new venture.

3. Create a Synthetic Track Record
   If a strong investment process or methodology has been developed, a simulated or back-tested track record can be created. While not as impactful as a live track record, it can still demonstrate an investment philosophy and potential performance.

   Please be careful as to how the fund manager provides this hypothetical track record, as the information cannot be misleading. In particular, if the fund manager will be a registered investment adviser, there are certain rules that must be followed under the SEC’s marketing rule.

4. Leverage References and Endorsements; Create a Board of Advisors
   Former colleagues, supervisors, or clients can provide references or endorsements that highlight contributions to a successful investment track record. Consider creating an advisory board of industry veterans, which may include offering them an ownership stake in the business.

Conclusion

Licensing a track record from a current or former employer can be a powerful asset when starting a fund, but it is not always possible. By understanding the rights involved, negotiating where possible and leveraging alternative strategies, fund managers can build a strong foundation for success. With the right approach, expertise can be demonstrated and investors can be attracted to bring an asset management business to life.