In any personal relationship, trust is fundamental. Here at Alderwood Capital, we offer a solution to founder management teams of asset managers who need a new shareholder, often to facilitate the long-term retirement planning for one or more of the co-founders and the transfer of equity to their successors. The founders have typically built their business from the ground up – it is their life’s work, the pinnacle of their professional careers. Bringing a new partner to the board room table who fails to understand the culture and ethos of the business, where trust is not offered and reciprocated, can be enormously destructive.
Having spent more than 20 years investing in the asset management sector, the Alderwood Capital team have seen many examples where equity has been sold to an external shareholder but where trust was never established or has subsequently broken down, to the detriment of all owners, employees and to the external stakeholders of the business. Those case studies have helped us to develop some “rules of the road” which we believe are key to creating that critical component of a successful relationship: trust.
Take the time to get to know each other
Strong relationships are not developed overnight, they take time to form and mature. If someone is in a rush to sell us a stake in their business it indicates to us either that they care little about the future of their firm or that they believe the business will suffer a near term reversal in its momentum. Either is a reason for us to walk away.
When we make an investment, we will work collaboratively to draft a shareholders agreement or partnership agreement. By their nature, such agreements are focused on the contractual rights of the shareholders when things become contentious or go wrong. We have learned that agreeing those terms is much more straight forward when all parties have a clear and shared understanding of the aspirations and fears of the others, where there is a clear alignment around the vision for the future of the business and where all parties are aligned around common ownership of ordinary equity. Without that clarity of mutual understanding, negotiations become protracted, contentious, and expensive; fundamental points underpinning the relationship can be neglected or missed. Rushing into drafting too early before the foundations of strong interpersonal relationships have been established is a false economy. Time may have been saved, but at the expense of enduring trust.
Always have their back
Alignment of interests with the working partners of a firm we invest in is crucial. Some GP Stake investors have made investments in asset managers that directly compete with other managers in their portfolio. How can a management team believe we have their best interests at heart when, in reality, we are backing another horse in the race? How can they trust us enough to share information about their business when we may have a financial incentive to share that with a competitor? Why would they want to use us as a sounding board and adviser when they are unsure whether we really care? How can we be helpful with introductions to new prospective clients when we have stakes in multiple competing managers who could also benefit from the same introductions?
At Alderwood, we believe conflicts and misaligned interests are fundamentally destructive to trust. We will never invest in a business which competes with one of our existing investee managers and we have placed strict limits on the amount of capital we plan to deploy so we do not fall to the temptation of breaching those boundaries. For us, it would always be unacceptable to prioritise our own personal interests over those of the limited partners of our fund and the working partners in the businesses in which we invest.
Trust works both ways
We all know the story of the enthusiastic young management consultants, fresh out of MBA school, who are hired straight into senior advisory roles. All too often, it turns out the advice, while well intentioned, is naïve, misguided and ultimately destructive.
The Alderwood team benefit from having worked in senior leadership, operational and advisory roles within world class institutional asset management companies for many years. We understand how the industry works in practice, not just in theory. We have been there, created and enjoyed the successes, made the mistakes, and we have both the accolades of triumphs as well as the battle scars of lessons learned to prove it.
We do not believe that, just because we have acquired a stake in a business, that we are suddenly blessed with some insight which means we know how to run the company better than the working partners. Yes, we have different perspectives, drawing from our broader experiences of investing across the sector, which we can use to be helpful if it is needed. But we also know that running a specialist asset management company requires deep knowledge of the asset class, the investment process, the clients and the people working in the business. This is knowledge that the working partners bring to the table; we are foolish if we fail to respect their insights and expertise.
If we cannot be certain of our confidence in management’s ability to run their business, we should never have made the investment in the first place. And if we have sufficient confidence in their investment skills, their judgement and their business acumen to make an investment, that doesn’t change the day after we become a shareholder. We never get involved where we cannot add value.
Walk the talk
A promise broken is a promise never forgotten nor forgiven. We will never promise access to a distribution engine capable of transforming a second-rate business. We will never promise access to seed capital beyond our ability to deliver. We are clear and transparent about our investment time horizons and our ultimate exit strategy.
We aim to deliver absolute transparency in our objectives and our interests. Surprises, particularly unpleasant surprises, are the enemy of a trusting relationship. And we expect the same of the leadership teams of the companies in which we invest.
When things go wrong
All of the above observations are largely uncontroversial. But as we all know, stuff happens. People can fall out with each other. Perspectives change. Objectives change. Difficulties arise. And when they do, our ethos is to deal with them head on but with maturity, consideration and respect. It may be that we are no longer an ideal investor in the business. If so, we should work with the working partners to identify a new ownership solution. It may be that a working partner is no longer working with their colleagues collaboratively towards a common objective or has become distracted by other interests. No relationship lasts forever, and we recognise that sometimes a separation may be the best solution for everyone. Managed appropriately with sensitivity, these challenges can be smoothly managed to minimise the damage. But handled badly, or allowed to fester, and the outcome can be hugely destructive. The key, as always, is never to ignore the problem but to get around the table in a spirit of compromise and mutual respect. So long as trust is preserved, any problem can be resolved amicably. We have learned that.
My word is my bond
Our team’s ability to originate investment opportunities and deploy capital in the asset management sector relies upon the reputation we have established over our 20 years of investing and building successful relationships together. We are pleased that we can offer references from the leadership teams of the companies in which we have invested. Admittedly, some may be more glowing than others – we may aim for perfection but we are only human. We encourage any firm contemplating accepting an investment from Alderwood to do their own due diligence on us as a team and each of us as individuals.
We are fundamentally aware of our twin roles as fiduciaries acting in the best interests of our limited partners and as trusted partners for asset managers who are contemplating one of the most significant and potentially perilous decisions of their careers. We do our best to live up to the trust others place in us.
At Alderwood Capital, we do not believe GP Stake investing is a zero-sum game. By demonstrating that we are a preferred partner to our investee managers, we offer our limited partners the opportunity to invest in firms which would never willingly contemplate an investment by some of our competitors. By conducting our business relationships with our investee managers transparently with fairness, respect and integrity, we maintain strong relationships with the key individuals who are essential for the future success of those businesses, supporting our long-term return on investment.
Pursuit of short-term gains at the expense of long-term success is never the right option. Reputations are hard to build but easy to destroy. There are no second chances. And you can trust us on that.
Alderwood Capital LLP, 2021.