The Challenges of Capital Market Inefficiencies for Small and Medium-Sized Funds
Small and medium-sized funds face numerous hurdles due to inherent inefficiencies in the capital markets. Let’s dive into seven key operational problems and how they impact these funds:
Lack of Track Record: Small and mid-sized funds struggle to prove their worth due to limited assets under management (AUM). Without sufficient capital, they cannot demonstrate the effectiveness of their investment strategies or build a track record of past performance. A study by Preqin reveals that 63% of investors consider a fund’s track record the most crucial factor in their decision-making process. This creates a vicious cycle where funds need a track record to raise capital, but the inability to raise capital prevents them from building one.
Inability to Grow AUM: Growing a fund’s AUM is critical for success, but capital market inefficiencies, macroeconomic conditions, and the fund’s track record can impede this growth. Research from Bain & Company indicates that 70% of fund managers find raising capital challenging, especially during economic uncertainty.
External factors such as fluctuating interest rates, bond performance, and economic cycles can adversely affect a fund’s ability to attract new capital.
Trust Component: Trust is fundamental in investment management. Funds with limited performance history and small AUM struggle to gain investors’ trust. According to a survey by EY, 55% of investors are hesitant to invest in funds without a proven track record. This lack of trust hinders a fund’s ability to secure external funding and compete with larger, established funds.
Cost of Fundraising: Raising capital involves significant costs, including engaging FINRA-approved brokers or placement agents. These fees can range from $50,000 to $500,000 upfront and $500,000 to $5,000,000 in success-based fees. McKinsey reports that high fundraising costs can deter small and mid-sized funds, affecting their ability to raise capital efficiently and impacting their operational budget.
Lack of Quality Deal Flow and Participation Rights: Securing participation in lucrative investment opportunities often requires immediate access to capital. Smaller funds frequently miss these opportunities due to limited cash reserves. A study by Cambridge Associates highlights that smaller funds often struggle to participate in high- quality deals, as sponsors prefer well-established funds with readily available capital.
Cost of Fund Administration, Auditing, Custodianship, and Legal Expenses: Once capital is raised, funds incur additional administrative fees, auditing, custodianship, and legal expenses. These costs can range from $100,000 to $1,000,000. KPMG highlights that these ongoing expenses significantly impact a fund’s profitability, especially for smaller funds with limited resources.
Time: The time required to secure capital, set up the fund structure, seek opportunities, and negotiate participation rights can be extensive. This process takes four to eight months for significant established funds, while small and mid-sized funds may take six months to two years. A survey by BlackRock found that 45% of investors cite the speed of capital deployment as a critical factor in their investment decisions.
Addressing Capital Market inefficiencies at Proceeds.
We have reimagined the capital market landscape at Proceeds to provide efficient and effective solutions for small and medium-sized funds. Here’s how we address the key challenges:
Streamlined Capital Deployment: Proceeds deploy capital directly into fund offerings, providing immediate access to financial resources. This allows funds to quickly seize investment opportunities, scale operations, and enhance portfolio performance. By bypassing traditional capital-raising channels, we ensure a faster, more efficient process.
Reducing Operational Costs: Our approach eliminates the need for extensive and costly capital-raising efforts. Partnering with Proceeds allows funds to bypass lengthy fundraising processes, focus on improving operational efficiency, and make strategic decisions that drive performance.
Navigating Regulatory Complexity: Proceeds understand the regulatory requirements in various jurisdictions and structure financing products that comply efficiently with these regulations. This reduces the compliance burden on funds, allowing them to focus on growth and innovation.
Enhancing Market Efficiency: Proceeds reduce the need for funds to engage with multiple intermediaries by providing direct capital deployment. This streamlines the process, reduces transaction costs, and ensures efficient allocation of capital where it is needed most.
Building Trust with Investors: Partnering with Proceeds offers your fund the support and reputation needed to build investor trust. Our track record and reputation help attract and retain investors more effectively, allowing smaller funds to compete on a level playing field.
Cutting Fundraising Costs: With Proceeds, you can bypass the high marketing and distribution costs associated with traditional capital raising. Our direct capital deployment allows funds to access necessary resources more efficiently, reducing the financial burden of fundraising.
Accelerating Capital Deployment: Proceeds revolutionize the capital structuring process for small and mid- sized funds, reducing the time required to raise capital from 4-12 months to 4-12 days—or even 4-12 hours under favourable conditions. This acceleration is achieved through cutting-edge AI and machine-learning models that enhance human efficiency.
Let us see what the Market Study says about some of these inefficiencies.
What is your biggest challenge in fund growth?
Limited Access to Capital: According to Preqin, 63% of investors consider a fund’s track record the most crucial factor in their decision-making process.
High Operational Costs: Deloitte found that operational costs can consume up to 40% of a smaller fund’s total expenses, compared to 25% for larger funds.
Regulatory Complexity: A KPMG report highlights that regulatory compliance costs have increased by 107% over the past decade for small and medium-sized funds.
Market Fragmentation: The CFA Institute reports that market fragmentation increases transaction costs by up to 15%.
Investor Mistrust: EY’s survey shows that 55% of investors hesitate to invest in funds without a proven track record.
High Marketing and Distribution Costs: According to EY, marketing and distribution costs account for approximately 20-30% of smaller funds’ total capital-raising expenses.
