In this article, Emanuel Datt of Datt Capital why alignment between fund managers and their investors is crucial.
Watch those incentives
Alignment of interest is a concept basic to a great many modes of human behaviour yet in the funds management sector it does not necessarily receive the attention it deserves.
The best example of alignment of interest in this sector is when a fund manager puts their own personal money into the same fund that they, as a manager, are offering to outside investors.
And for it to have any real meaning it needs to be a substantial amount of money, either by virtue of the quantum or by the percentage of the fund that the manager invests and puts at risk alongside its customers.
Despite the plethora of analysis of investment funds open to the public, there is no easily accessible table, or research, available to mum and dad investors to ascertain which fund managers actually ‘walk the walk’ rather than simply talking the talk.
We adopted a co-investing approach since the inception of our fund, the Datt Capital Fund. Besides delivering solid results one of the increasingly significant reasons investors are drawn to our fund is due to the nature of co-investing. We remain significant investors in the fund.
Why we co-invest 50%
Our co-investment level of 50% is one of the highest in the industry and quite possibly the highest.
When we say ‘we treat every dollar invested as if it was our own’ it is a simple but powerful statement. Equally, it’s a creditable and verifiable statement, and it resonates with investors.
Fundamentally all investing is investing in the people running the company or Fund.
We advise all potential investors to look for honesty and transparency when considering an investment and to focus on core objectives, a record of independent and creative investment ideas and alignment with other investors.
Whilst many boutique investment firms claim to be aligned, it is very rare that they hold material positions, greater than 10% of the Fund by value.
Increasingly we are seeing potential investors treat the fact that they have the opportunity invest alongside us rather simply having their funds managed by us as a light bulb moment.
One of our recent new investors, a female professional, clearly understood the value proposition investing in a Fund where the manager made the majority of their return via their own investment in the Fund.
Another investor, a rural business owner, especially liked our independent thought process and the fact that the fund manager was willing to invest their own funds into high growth ideas balanced with more conservative investments.
Co-investing commonplace in the private equity world of ‘limited partners’ and ‘general partners’. Given the innate benefits and unarguable logic of co-investing, we believe the Australian funds management scene is likely to see more investors paying attention to this compelling metric.
After all, if the fund manager doesn’t follow their own advice, why should you?