What role do investment consultants play in institutional allocations?
Short answer
Investment consultants advise institutions like endowments and pension funds on which managers to hire. Some hold a discretionary mandate and make the decisions. Others are non-discretionary and give opinions while the institution decides. Either way, they shape who gets considered, so I treat them as long-term allies. Winning one over can open doors that going straight to the fund will not.
Who sits between you and the check
If you manage a fund and want institutional money, you will often meet an investment consultant before you meet the investor. Endowments and pension funds are different from a family office. With them, you are sometimes dealing with a committee decision. Several people need to buy in. And sometimes an institutional investment consultant has a mandate with that endowment fund, advising it on its hedge fund investments.
The mandate comes in two forms. Sometimes the consultant has a discretionary mandate and makes all the decisions. Other times the consultant is non-discretionary and only gives opinions, while the endowment or pension fund makes the ultimate decision. You should find out which one you are dealing with early. It tells you who you really need to convince.
In this clip I walk through the five types of hedge fund investors, including how endowments and pensions work with consultants.
Summary and key takeaways from this video
"Either way, you want to get on the good list of these institutional investment consultants. They can be a great ally of yours if you win one over on working with you long term."
I say ally because that is how it plays out. A consultant who likes your firm can keep you in front of several institutions. That is a different game from chasing one investor at a time.
The third-party checks that come with institutional money
Consultants and similar outside reviewers do due diligence on managers. My friend John talks about this from the operator side. In his experience, institutions generally will not invest without an institutional platform, and you have to pass the requirements of third-party due diligence firms. He named Mercer and FactRight as examples. It took him many years to earn top ratings from each of them.
John was candid that this was not cheap. He did not have much money in his fund when he started paying for audited financials every quarter, which he put at around $100,000. He also did not have the big firms, the audit, outside advisers or a fund administrator when institutions first came knocking. He built all of it over time.
John explains what he had to put in place, and what it cost him, before institutions would invest.
Summary and key takeaways from this video
Here is the checklist he described:
- An audit, with audited financials on a regular schedule
- Offering and fund documents prepared with experienced professionals
- Third-party advisers
- A fund administrator, including monthly NAV
John's view is blunt. If you will not spend the money and time on these things, you are wasting your time chasing institutional capital. I agree with the spirit of that, though what you need will depend on your strategy and your investors.
How I would approach consultants as a manager
First, do not treat a consultant as a gatekeeper to get around. Treat the relationship as long term. At Family Office Club we see many managers pitch once, hear nothing and give up. Consultants tend to reward managers who stay professional and consistent over time.
Second, get your house in order before you ask for the meeting. A clean process, clear reporting and the service providers above all matter more here than a polished story. Third, ask each institution who makes the final call. If a committee decides, learn how it works and what the consultant's role is.
Finally, many managers talk to a securities attorney about their fund structure, marketing and any consultant relationships. I am not giving legal advice.
From the Family Office Club stage
One point on timing. At the startup phase you are usually not targeting institutional investors, and I tell managers you often need somewhere around $70 to $100 million, maybe even a couple hundred million, before institutions and their consultants will take you seriously. Most people start with friends, family, angels and private investors, and the family office space is the middle ground. Even so, building to institutional standards early pays off. Almost nobody raising $50,000 at a time has a master due diligence questionnaire, yet having what institutions require helps you with high net worth investors who do not know what to ask.
"At the startup phase you're not targeting institutional investors. You really need to get to usually $70 to $100 million, maybe even a couple hundred million, before you have institutional around. A lot of people start with friends, family, angels, private investors, and then the family office space is really the middle ground."
"For example, nobody raising capital $50,000 at a time that I know of has a master due diligence questionnaire, but those investors ask all the time, what else should I be asking? I don't know what I should be asking next in my due diligence. Well, having what all the institutional investors require would help you at that high net worth level."
From the source
- Investment consultants to endowments and pensions can hold a discretionary mandate and make all the decisions, or be non-discretionary and only give opinions.
- John says that in his experience institutions often require passing third-party due diligence from firms such as Mercer and FactRight, and that earning top ratings took him many years.
- John put the cost of quarterly audited financials at around $100,000 when his fund was still small.
Sources
From Richard C. Wilson's Centimillionaire Strategies YouTube channel: 5 Types of Hedge Fund Investors, How to Build a $1B Real Estate Platform | John Lettera & Richard C. Wilson. Quotes come from the video captions, lightly edited for readability. Figures are the speakers' own estimates and experience.
General education only. Not legal, tax or investment advice.
Talk to a securities attorney to explore options around fund structure, marketing and outreach rules and offering documents. Do not use AI to write your own legal agreements.
Next moves
- Find out whether a target institution uses a consultant and whether the mandate is discretionary or non-discretionary.
- Ask who sits on the committee and who has the final say.
- Get audited financials, a fund administrator and well prepared fund documents in place before pitching.
- Build a long-term relationship with the consultant instead of a one-off pitch.
- Consider talking to a securities attorney about your outreach and fund documents.
More questions on this
What is the difference between a discretionary and non-discretionary consultant?
A discretionary consultant makes the investment decisions for the institution. A non-discretionary consultant gives opinions, and the endowment or pension fund makes the final call.
Do I need an institutional platform to work with consultants?
John says yes. In his experience, institutions often will not invest without one, and managers usually need to pass third-party due diligence from firms like Mercer and FactRight.
Can a small manager still raise from endowments and pensions?
It depends on the institution and your track record. Many want to see a strong platform first, so I would build that before spending time on consultants.
Related questions
- What is an operational due diligence questionnaire for fund managers?It is the written list of questions an institutional investor sends a fund manager before allocating capital.
- What do endowments look for in emerging fund managers?Endowments want a manager who can win over a group, not just one person.
- Why Do Institutional Investors Reject Emerging Managers?In my experience, many rejections trace back to a missing institutional platform.
- What is the minimum check size for institutional investors?There is no single minimum check size for institutional investors.
Work through it with the how much to raise calculator. See all institutional investors resources.