Making Billions: How to Launch Your First Hedge Fund

Hey, welcome to another episode of Making Billions. I'm your host, Ryan Miller and today I have my dear friend Kevin Fu.

Kevin is the founder and CEO at Repool, it's a fintech company helping emerging hedge fund managers to launch, scale and manage their investment funds. As a 2021 Y Combinator graduate he's raised capital from all the elite investors like Brexit, Mercury, Flexpoint, Matrix, and more.

So what this means is that Kevin understands how to launch and scale hedge funds, and is about to give you and I a masterclass on how to do the same. xFIaijmY0pxL7j0J4hTm 

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[THE GUEST]:Kevin is the founder and CEO at Repool, it's a fintech company helping emerging hedge fund managers to launch, scale and manage their investment funds.

 

Transcript

Ryan Miller  

My name is Ryan Miller and for the past 15 years have helped hundreds of people to raise millions of dollars for their funds, and for their startups. If you're serious about raising money, launching your business or taking your life to the next level, this show will give you the answers, so that you too can enjoy your pursuit of Making Billions. Let's get into it. 

Ryan Miller  

What's one thing successful people have in common? Well, if you're asking me, they've all had great mentors. My next guest is a hedge fund mentor and he's dedicated his entire career to helping people to know the best way to launch a hedge fund, so that they too can enjoy their pursuit of Making Billions. Let's get into it. 

Ryan Miller  

Hey, welcome to another episode of Making Billions, I'm your host, Ryan Miller and today I have my dear friend Kevin Fu. Kevin is the founder and CEO at Repool, it's a fintech company helping emerging hedge fund managers to launch, scale and manage their investment funds. As a 2021 Y Combinator graduate, he's raised capital from all the elite investors like Brexit, Mercury, Flexpoint, Matrix, and more. So what this means is that Kevin understands how to launch and scale hedge funds, and is about to give you and I a masterclass on how to do the same. So Kevin, welcome to the show, man.

Kevin Fu  

Hey, Ryan. Yeah, it's really good to be here, as someone who's listened to the show quite a few times myself. It's fun to be on finally, myself. 

Ryan Miller  

Yeah, man. Well, thank you, we're, we've been fortunate to be in the top 2% in the world, it's all because of amazing guests like you. So let's jump right into it. Tell me a little bit about just 30 seconds, what does Repool do and then we'll jump into some beginner's advice?

Kevin Fu  

Yeah, well, you know, I think you gave a good preview, but in short Repool is a venture backed, digital first hedge fund solutions provider. So we provide modern back office solutions to help emerging and established fund managers alike to be more successful, drive better investor relationships, and overall have better outcomes with services like end to end fund launch, standalone fund admin, and also fund software that can plug into an existing back office stack.

Ryan Miller  

Brilliant, awesome, man, you're essentially launching hedge funds, and as well as back office services, and administrative, all that stuff. So that's brilliant, the end to end stack, I love it. You've been a beginner, I've been a beginner before, listen and right between the eyes. In your opinion, starting out taking all your knowledge, what are some of the pieces of advice you can give to people who are just starting out in their hedge fund journey or any of that? What would you tell someone starting out to get some early points on the board?

Kevin Fu  

Yeah, definitely an in for context. You know, at this point, over the last few years, since we began operating, we've worked primarily with US emerging managers and in particular, we focus on open ended funds. A lot of our clients have the traditional fund manager background, you know, they were on some desk, but actually, a lot of our clients have a quote unquote, non traditional background, right? They're just a talented trader in their own right, maybe they're a wealth advisor launching their first one, maybe they're someone who's been trading on their own for 15 years, and is otherwise, you know, some sort of other white collar professional. In short, we've seen a lot and so I think the number one thing that comes to mind for me is, even though fund managers are generally very brilliant at raising very similar to a lot of startups, they often kind of skip certain steps that are really important. And I think the big one is to actually make sure that prior to launching, you have true, hard committed capital from real investors and a really solid game plan on the multiple kind of variations of, you know, expected case, worst case, and best case. So many people really don't actually go as far as to firm the commitment, you know, they'll have these conversations with prospective investors and they'll keep things very soft, like, oh, I'm thinking I'm watching have fun, you know, you know me, I'm great, you think I'm great, would you be interested in investing? And the investor says yes, and then they come and they talk to lawyers and from service surprise, they go, oh, I've got these soft commits. But those are not actually commitments, right, and raising capital is really challenging. Obviously, Ryan, you've been really successful at it, I'm sure your viewers, I've learned a lot from you. But there's just a big difference between someone that you're friendly with or even close with, in kind of floating an idea, or talking casually, in making the explicit ask. So going as far as to make it almost as real as if you had the fund and saying, hey, you know, can we handshake on this or getting some sort of literal LOI, email confirmation? Telling them like, this is real, I'm going to do it, what are you in for, you know, on this timeline? I think that's the big thing that comes to mind for me. 

Ryan Miller  

Brilliant. So just making sure you get real commitments from real investors. None of this, if you build it, they will come. That's very old school and the hit rate as it coming out of Y Combinator, you would know if they knock that out is just saying, nope, you got to iterate, you got to get real commitments for people and make sure that whatever you put in the market, people want to pay for it and so when you have that, man, that is powerful. Now, you and I, we've spoken offline, we know we're known each other for a little bit now and I'm curious helping people launch hedge funds. What have you found as far as like metrics, what advice can you give people as far as sharing financial information? Maybe you can speak on that for beginners?

Kevin Fu  

Yeah, I mean, I think the first step, it's almost pre metrics, is to understand who you're racing from. Right? So there are levels to the game and it's not actually that important that you're in a particular level, it's that you play the right game at the level you're in. So a very common manifestation of this that I think is a mismatch and it affects the metrics too is, people say things like, oh, like, I just need to be up and running. I have this amazing strategy, once I actually have this marketable track record, then I'll for sure raise from, you know XYZ type of institution allocator. But one, those actual relationships don't exist and they don't know how to get in front of them, which kind of ties back to what we were just talking about. 

Kevin Fu  

But two like what those investors will care about, and what you need to be prepared to be sophisticated about in discussing your strategy in a prospective allocation and metrics. Is very different than if you're raising from, say, friends or family or something in between, like regional family offices that don't necessarily look at hedge funds or private funds, and like, you know, kind of the most common financial hubs. And so, essentially, I think you really want to tailor your metrics to your audience, which sounds really obvious, but I think it's something that often doesn't happen. And you, you know, first impressions are kind of everything, if you walk into your first true allocator fundraising meeting, and you blow it, you know, it's not dead forever, but you've kind of burned that prospective raise for a pretty long time. 

Kevin Fu  

I think at the most sophisticated level, if you can, and you have any sort of marketable track record legally, being able to speak to how correlated it is, I think, is very important. That arguably, to me is one of the most important, is you need to have a really strong view on how you fit into an allocator's overall strategy, right? Are you long short? Or are you something very esoteric, or anything in between, and then derivative from that you should at least be able to speak to things like your Beta, and your Sharpe, and ideally have some sort of back testing and forward looking forecast. And then as a derivative, right, it's not just about the metrics themselves. Historically, it's about your ability to convince the allocator that the strategy is durable over time, from a scale perspective, or what we might call capacity, right? Like does your $5 million strategy work at 100 mil, the guy cutting the $50 million check doesn't care if it works at five, if you can't convince him, it works at 100. And you need to have sophisticated answers for how you will defend against fee creep, how you'll be able to scale a strategy that maybe isn't trading on the most liquid items, etc. Or you know, what types of instruments you'll add as the strategy grows to maintain your target allocations and overall kind of return profile? 

Kevin Fu  

And then also through macro trends, right, I think especially the last few years, investing in allocators just everyone, we're just more short sighted. I don't mean that in a bad way, I just think everyone is more cognizant of the fact that things move faster now, right? Just look at average holding period for ETFs, as an example, allocators used to hold position 7, 8, 9, 10 years, that was the average holding period. Today I think the average holding period for an average investor of a ETF is something like 2-3 years. And you know allocators are more sophisticated, but that's translated them to there, they're more willing to make redemptions more quickly, they're more willing to rebalance their own portfolio. I mean, they're literally a fund manager in their own right, it's just that instead of investing into underlying assets, they invest into funds that give them aggregate exposure. So anyways, you know, you really need to have thought through all sorts of various hypotheticals on what happens if the risk free rate goes up? What happens if it goes down? What about in either of those two cases, if it's slower than you think, on pace with what you think, faster than what you think, you know, how does your strategy endure in any possible situation? Those are the questions that sophisticated allocators will ask, and you just need to have answers for all of them.

Ryan Miller  

I love that and so really wrapping your arms around the macros and just thinking it through. So you know, it does help, as I'm listening to what you're saying, I've done this. So I run a fund and part of the things that I do is I just try to flip the table, if somebody's pitching me, and I'm really gonna grind them, but not in a way to be mean, but really understand what it is they're trying to ask me to do. I mean, I want to know exactly what you said, hey, interest rates are moving around what's going to happen to your fund, whether it's private equity, real estate, whatever. What's going to happen if we've got, you know, 2 points, 3 points, like where I'm always finding the edges. And so a big part of pitching is, you're going to find a lot of allocators are going to ask you questions to find your edges and to say okay, what happens if it raises one point? Okay, nothing, okay, what happens if it raises 3, 5, 10 right, and they're just gonna say, how far does this go? And so even though we're not going to get a 10 point raise in the Fed funds rate, but what they're trying to do, even if the question sounds ridiculous, please understand that investors are trying to find where does it drop off exactly what you had mentioned, Kevin, so I love that. 

Ryan Miller  

Now. Also, it's not enough just to get points on the board, while that is good, you can still do some stupid stuff, otherwise known as rookie mistakes. Well, some stuff that you've seen, you've been in this for a little while, what advice can you give to beginners on how to avoid just getting smoked on their first one?

Kevin Fu  

Yeah, I mean, first of all, hopefully generate returns is step one...

Ryan Miller  

Don't lose money, ya haha. 

Kevin Fu  

Yeah, don't lose money, right? Well, but putting that aside, right, I think there's probably two things that come to mind. One is like just more of a philosophical point and that's to temper your expectations, and then have a plan and I guess that's just thematically in line with what I've started to beat a dead horse on, but most people just are less successful than they think they will be. That doesn't just happen in hedge funds, it happens in businesses, it happens in every aspect of life. You will probably raise less money than you think and it will take longer than you think, it will be harder than you think. And how not to lose like if you don't actually contemplate that reality in how you're going to feel how you're going to react, what your game plan is, if you don't end up in the happier half of the spectrum. That's where a lot of people who are otherwise really smart and I see this as a tech founder all the time. You know you just basically never seriously asked, will I continue on do my economics, does my runway support this worst case scenario? Or do you get kind of caught with your pants down, and then you're almost not even sure what to do, or you're just caught off guard. 

Kevin Fu  

Obviously, when things actually happen, it'll never be as you planned, but just really try and plan, I mean, that's kind of it and planning is free and it's easier than trading in some senses. Most people just are not as thorough as they could be and just recognize this is a really hard game, right? There are people with incredible backgrounds, incredible pedigrees, incredible track records, that go out and try and start funds, and they fail. And then there are people who have much worse of all those things and succeed. So it's not just this pure play, everything that you do has some sort of points system, and we put the points together, and then people succeed sequentially relative to you know, their absolute value. This is an art, this is a science, right and I think, Ryan, you know, we were just talking about this, you're a great example of that you've really killed it a Pentium and built an asset management business that I think many people with, quote unquote, better backgrounds would be super envious of. And that's incredible, but it also shows that this is about a lot of different factors, not just things that you think are true or false, right.

Ryan Miller  

Thank you for watching, if you've made it this far, we must be friends. So don't forget to like, subscribe and click that notification button. Now, let's get back to the show.

Kevin Fu  

So that's the philosophical point, I think the practical one is understand the problems you need to solve, solve those and don't solve problems you don't have. I think a lot of fund managers out there obsessing over things and I think, if I had to guess, I think it's just that, like, you want to feel like you're in control and so you try and solve problems that you can identify and it kind of gives you this feeling like you're doing something structured and intelligent. But it's, it's kind of like focusing on what doesn't matter, again I'll do these company analogies, because I am in tech and working on a venture backed startup and see this, it's like, founders often go solve problems that are not even close to the highest order problems. So they're busy, and they're doing things and they look like they're doing things, but it's just not actually even close to the most important thing they should be doing. So in the context of funds, it's often thinking towards, like, oh, like, this is how I need to structure the fund today. Because when I'm 100 million, and I'm raising from these international family offices, I need to have like my tax situation figured out. So I have my, like my Cayman Blokker vehicle in play and I have this like super prestigious accounting firm like KPMG, doing my audit, and it's like, no, man, you're trying to raise 15 million, you can't afford those and those are problems that don't actually exist. So solve them and hope that you have the luxury of having those problems, but at worst, it's just a delay, because you're solving things that literally don't matter. And it also causes you I think, to just lose time, time is really valuable, that's time you could be refining your pitch, that's time you could be getting your fund up and running, that's time you could be refining your strategy. I mean I see this really, really, really often, so I think it's just really have an honest assessment of who you are and where you are and what you think is realistic. 

Kevin Fu  

Maybe the final iteration of this philosophy is, a lot of people peer compare. They'll say something like, hey, I have like Ryan's background, and Ryan's got, like a billion of assets under management. So like clearly, I will too, therefore I need to approach launching my fund, like how Ryan would launch his sixth fund and you see this actually more often with institutional books. It's like oh, my buddy, who was a PM at Citadel left and was seeded with 100 mil, and he spent 2 million on his launch. It's like, do you have a seed investor for 100 mil lined up? If not, who cares, go solve your own battle and so you should definitely learn, there's a lot to learn from other people, there's a lot of advice, but just really understand your truth and go solve for that. 

Ryan Miller  

Yeah, that's brilliant. So don't compare, that's just good life advice, that's the enemy of happiness or joy. But also you really have, I think what you're talking about, I'm totally putting words in your mouth, but a little self awareness, and just appreciate where you're at, have a vision of where you want to go, obviously. But knowing where you're at, and addressing the issues in front of you is so important and I've seen this and honestly, in my opinion, to echo the brilliant advice you just said, that would be a leadership problem and sometimes you got to lead yourself. And if you're constantly chasing things that you don't need to be chased while ignoring the immediate. And look, I've done it, I'm a strategic thinker, so I'm working on, I'm always playing the long game and moving the chess pieces around. And lucky for me, I have great partners that bring me back and say, look, we love your strategic mind, we got stuff we got to deal with right in front of us. And so that is a real thing that Kevin's talking about folks is saying, sure, if you want to be in the billy club, right, you want to manage a billion AUM and above great, sure, go for it, absolutely. But what about though, your first million, and I would say the grind and Kevin, you may have a different opinion, but I would say your first milestone is just get to 25 million. If you can get to 25 million, you can have enough fees to start paying a couple salaries, and really just stabilize your fund. 

Ryan Miller  

So your goal is not to be like I'm gonna go crazy, it's just saying iterate and keep raising the bar, so get to that place where you have enough fees in your hedge fund where you can actually manage it. Now the beauty of hedge funds, we obviously have one, is their up costs are very nice. They're, they're very affordable, so we definitely like hedge funds, but to that point just to land this plane, let's just make sure that you are managing the funds that you have, as well as the funds that you're going to be and so it's a bit of a ping pong game, but you can't neglect one for the other. And so Kevin is just you’re spot on brother, you got to make sure that you also deal with the fund that you've got, and not just solely work on the fund that you know you will be. So I absolutely love it. 

Ryan Miller  

So as we turn the corner, let's talk about the market, right, especially hedge funds, you help a lot of people launch hedge funds, what are you seeing out there? Where's the market at right now?

Kevin Fu  

Yeah, so I think one of the interesting trends that is quite good for, you know, what I assume to be the types of listeners of this show is, the smaller funds are definitely on the up in the cycle. I think markets have every kind of cyclical and actually allocator behavior towards what size and types of hedge funds are no exception. So both the asset types that are favorable and invoke and most popular with allocators, as well as the size of funds tend to cycle and right now I think we've come off a huge boom cycles, or everyone kind of knows what's been going on, where these traditional asset managers have become extraordinarily bloated, right? They're just massive now and that's because it was easy to generate returns and it was very low risk, because there was no interest rate. So it made sense to just pile into who you knew worked, and they can still generate reasonable returns. 

Kevin Fu  

But in this new world, which is potentially going to persist indefinitely, in fact, I think most people think surp is the exception, not the normal that we'll return to. It's just really hard to generate interesting Alpha when you've got many, many billions under management. And so the trend you see is the asset managers get very famous and a reputation off of when they're small, people pile in and then they don't generate interesting returns, and they kind of coast on their reputation and I think that's just the eternal battle. But it has gotten to the point that it's so severe that I think people are actively starting to look towards smaller funds again. A lot of allocators have specific goals around allocating to emerging managers. They're being more aggressive about making many small sized investments, distributed against many small funds, rather than taking that same pool of capital and give it to a large fund. 

Kevin Fu  

So if you can, and this ties back to the last answer in terms of things that have value. If you can get your track record out and run it for long enough time, while the market conditions are favorable for a small manager. I think right now is a macro moment that will persist for at least several years, where you're probably more likely to get in front of these institutional allocators and family offices and high net worth individuals, than you would have three, four or five years ago. So you know, one of the things you can do is, instead of solving problems, you don't have like, the one thing you can't just big brain or pay money for his time in market track record, you know, if you in the next 2, 3, 4 years, can have a vehicle that's been up and running, has strong metrics, that achieve your strategy and whatever investment objective, and then in this particular market condition, you can get out and take that track record in front of allocators, I think it's a good time to be a small manager. 

Ryan Miller  

Brilliant, so good time to be a small manager and I'm sure you know this, but there actually is research folks that confirms what Kevin says is, in fact, when you aggregate smaller funds, they tend to outperform the larger ones. So not only that is not an opinion piece by Kevin, this is actually a research documented fact that smaller funds do tend and aggregate to outperform the larger ones on an absolute basis. Now, where do you see it going? So right now people are liking small funds, personally, I think we're just entering the golden era of alternatives. We'll see if I'm right, but I think a lot of people are starting to wake up to that's literally this whole show is on alternative investments, entrepreneurship, and pretty much any kind of fund that's out there. But that being said, that's great now, but people pay allocators like myself to look around corners. So I'm curious, just an opinion, what are you seeing out there? What do you see in the market? Where do you think it's going?

Kevin Fu  

I don't know that it's just alts that are about to have a good moment, I think it's just uncorrelated and more unique strategies. Right? So if everyone calls into the same old strategy, then I don't think that's interesting anymore. I think what it is there is so much better tooling now and technology that has caused publicly available low risk, investment opportunities arise that synthetically proxy, what you would traditionally only get from a hedge fund, right? So think of all these ETFs that are arising, or these alternative asset investing platforms where instead of paying at 2 and 20, there are really complicated indices that you know, give you exposure to instruments that you could have only ever gotten exposure to in a private fund. Except for like, now you pay up 10 basis point expense ratio, instead of giving some manager you know, whatever 150 basis points and a performance fee and on top of that the liquidity of the instrument is way higher because hedge funds are in private funds generally are more restricted. And so in order that's going from the most commoditized strategies, first to the hardest, and maybe 100 years from now private funds won't exist because we'll have figured out ways to synthetically proxy more liquid, low cost alternatives all of them. But my point is, you know alternatives are interesting because you still can't get exposure to alternatives unless you go and invest in a fund that gives you exposure to alternatives. 

Kevin Fu  

But long short man like, that's a hard game, because you can kind of do that through much lower cost options. That doesn't mean you can't succeed there, but it's about having an edge. So maybe what I've refined is you have to have a view on how your strategy or investment objective is different and where it slots in like, what are you giving an investor an allocator that they can't get without you. Alternatives are a great way to do that real estate is a great way to do that. It could be crypto, but it also could be regular plain vanilla equity long bias, if you haven't really interesting thesis that is not expressed in the market otherwise. Quantitative is much harder as an example, to replicate through ETFs because of a variety of technical challenges and trading restrictions. So you just need to really be able to understand where your edges Ryan, like you said, it doesn't have to just be alts, I think alts are a more obvious example of an edge implicitly because there alts, right? So I definitely agree with that and that's one observation. 

Kevin Fu  

The other I think, is that there are just more funds and it's also, there are just more investing opportunities and that ties back to what you said. So as a result, you need to find ways to find your own edge and be differentiated and I do think there'll be a bias towards funds that drive a better LP partnership, right? If nowadays, there's 10,000 long short private funds I can get access to and they're all, many of them are very similar at least, and I have the luxury of choice. Well, then, where I'm going to start splitting my decision is who gives me maybe better terms, who gives me better transparency, which funds are easier to work with? So I do think technology is really having a heyday and it's not just to talk our own book. I mean, that's literally part of the thesis behind why we started Repool, is we see that, but it's literally already happening in many of these private finance classes. Venture is probably the most progressive here, by nature of what they do I think that kind of makes sense, they make bets on the future of the world and where things are going. But there's all these really interesting venture tools that augment your back office now or more digital first fund admins that give investors easier onboarding, more transparency, digital first redemptions, capital calls, KYC, AML, communication, data room CRM, and so as an LP it's just easier. And so if I have two same funds, and one of them just gives me a way better experience, then I think LPs are demonstrably kicking back, so because there's more choice now, and because there's more funds, you want to in general index towards driving a favorable LP experience. 

Kevin Fu  

I think it is harder to justify two things, one is, really restrictive bad terms, like it's really hard to pull off like a five year lockup now, because for every five year lockup, there's some fund that does the same thing that has a three year lockup, so I'm going over there. The other is the experience, right, if you're a fund, where I'm still operating entirely out of spreadsheets, it's really hard to understand at a glance what your investment portfolio is, to the extent you're sharing it, or to subscribe or interact or get my capital out. I have to send a ton of emails, make a lot of phone calls, if your services force us, is offshore, and there's a literal language barrier. Those are things that were common even just 5-10 years ago, but I think are rapidly, rapidly, rapidly becoming less tolerable. So making sure that you pick service providers that represent your fund in the right way that is attractive to LPs. I think it's just attractive, and just everything we just always pick the better way, you see that in every form of technology ever, so private funds are no different. So those are the two big trends I would point out. 

Ryan Miller  

Yeah, I love that and that, that goes back into my ethos just as a company Pentium at our fund is we do very much obsess over LP experience. For those who aren't in funds, limited partner LP is just your investors and so really just reducing the friction. So I use the analogy or the example of Amazon where they have those speakers in your house and literally, you could shout out into the sky order me hot sauce, and it shows up. Like talk about a frictionless experience and so that is a great lesson in any kind of business, now, I don't want to just pepper general platitudes in business over everything. But what I am saying is think about the end user and their experience with you and reducing friction, or sometimes things that slow it down or frustrate, or whatever it is. Anything that gets in the way of a very smooth process, whatever that is, can really help you and I think as long as you agree, and that's what we're saying is, I think in the future funds who do prioritize LP experience and using companies and administrators that really help to smooth out that experience. I think those are the ones who are really going to get the LP capital, would you agree?

Kevin Fu  

Yeah. Look, I don't. It's not rocket science, right, it's just the simple question. Would I like things to be harder, or would I like things to be easier? And that's just how we all behave in any aspect of our lives, so yeah, definitely. 

Ryan Miller  

100%, thank you. So you know, as we round third base, a lot of people come to the show, Making Billions to look for a competitive advantage. And so speaking of prioritizing experience, one of the things that we do is we take pride in providing those competitive advantages so people's edges can expand. And so Kevin, with all of your experience, you've done a lot of cool stuff, you've raised from very impressive people. You've been through Y Combinator, which is impressive by itself as well, you've done a lot of stuff in my man, you're just getting started. So what can you do looking back and leveraging your experience, what competitive advantages can you provide for our listeners today?

Kevin Fu  

Yeah, I think in the context of private funds, generally not even just hedge funds, even though hedge funds are primarily our focus, but one actionable insight that, you know, we obviously can also help with is considering a 506 C offering, which is a relatively newer instrument. I think, Ryan, you've done this for at least some of your funds, and I know it's been great for you , we've talked about it before. But a lot of people aren't familiar with this, so to just give like a quick brief, educatation right, one of the considerations you have to have when you have a private fund is what type of securities offering are you doing. And in this context, it's not about you investing in securities, it's about the fact that when you bring on an investor, that very action, regardless of your structure, you are by definition, starting with security. And so there are regulations that regulate that and commonly, there are restrictions around solicitation that most of your listeners out there are probably familiar with, you probably have some vague impression that you can just go screaming down the street about your hedge fund, you actually can't even have a website in most cases and then folks need to meet certain financial standards. And so some form of that has been around for a really long time, a very new offering, especially in a slow moving 100 year old industry, such as private funds, is an offering type called 506 C. It's really only been around since post Dodd-Frank, I think the year, is 2014 is when it was ratified, or whatever you call it introduced or passed. And what the offering type does is it allows you to generally solicit, so you could literally run down the street screaming about your hedge fund, that probably isn't the best strategy. But more seriously, you could run ads, you could have a publicly available website that literally talks about your strategy, you can just show your returns to people. You basically have the opportunity to if you're good at marketing, or even if you're not just dramatically increase the surface area of potential allocators you can get in front of and that can be a really, really big help for an emerging manager. You know, if you say hey, I have the ability to raise, you know, 4 million and Ryan earlier you said 25 million, the magic threshold, I would definitely agree. I think 10 is around where you start to be like shelf stable, though. Like you can't hire a bunch of people, but like, at least you're paying your bills and it's like a full time job.

Ryan Miller  

Catch your breath.

Kevin Fu  

Yeah and so, you know, I've seen managers literally raise half or more than half of their funds through the solicitation side. Now the trade off is you have to verify that those investors are accredited to a higher standard. Normally, in a traditional offering, you give them a subscription booklet. It's definitely esoteric and complicated, but it is a self attestation at the end of the day, so they just check some boxes or a series of boxes and that's the extent of it. In SEC, you actually need to verify it, so another reason it's relatively unknown is when it was first introduced, it was kind of like, okay, well, what does that mean and then how do we do it? And originally it was you had to get like, investors would go get a letter from their lawyer or CPA, literally attesting that they were accredited. That was very painful, I mean, asking investors to do that is not fun. And a lot of investors are just simply not going to do it, it's not about whether they aren't accredited, it's just speaking of easier versus harder. That's a big hoop to jump through and a lot of allocators are privacy minded and just don't want to open the kimono, regardless of whether what's behind it is good or bad. 

Kevin Fu  

Nowadays, there are providers like us, and we're certainly not the only ones, but I think our offering of it in conjunction with fund admin, fund launch and standalone back office is relatively unique. But we have digital for ourselves where we make it really easy to collect the appropriate information, tax returns, statements, whatever commensurate to the means by which they claim to be accredited. And then there's still a real human on our side, verifying it, and then we'll produce like a letter that should be suitable for regulators. And in short, what we do is we totally abstract away the pain of verifying that someone is accredited for the manager. And we make it as easy as humanly possible for the LP, and now you gain in return the ability to generally solicit and there's no application process, it's what's called a self executing exemption. You know, I always use the analogy, it's like driving down the highway, you don't even ask someone's permission to do it, but you better be under the speed limit, if someone looks. And that's the same with 506 C, so you can just do this right now. But everyone has to go through that higher standard and I think there's been a lot of fund managers who have seen huge payoff from it, larger, raised more capital, more quickly and that can be a life or death difference, or it can also just be a time to launch difference. 

Kevin Fu  

And again, as we said before, the one thing you can't structure, pay your way out of it is, time in market, time building a track record. If that lets you launch today, instead of two years from now, that is two years of track record and as a reference point allocators usually want three when they're sophisticated. So now you are literally only one year instead of three years away from potentially being able to pitch really serious allocators and blow your fund up. So it is incredibly valuable, now that there are obviously trade offs, you know, the types of LPs are gonna come in, their behavior, especially when you lose money, since you don't have a pre existing relationship with them. They may be more demanding, they may be more testy, they may be more flighty and more willing to leave when things go bad. But for a lot of managers, I think it's a trade worth considering. And obviously, it's not like you have to make this the entirety of your LP base, so I would say that's the big one. I think it's novel, I think a lot of people don't know about it and I would really encourage people to think about that if it's appropriate for them.

Ryan Miller  

 Yeah, brilliant. What's another piece of advice, so 506 C, it's relatively new, about 10 years or so since it's been passed. It allows you to openly solicit versus the old school way, which was maybe your dad's golf buddies. So for those of us and I'm certainly one of them that may not have grown up in that environment and had a different experience and not have rich friends from your parents, then this 506 C might be something where people with non traditional backgrounds who maybe don't have you know, everybody to fill their fund, they came out of Citadel, like you said, or somewhere 506 C  can be an absolute game changer for them. The second thing, what would you say for competitive advantage that you can get people?

Kevin Fu  

Yeah, it's a great question. I think if I had to pick a second one, it is a little redundant, but I really don't think it can be expressed enough, in enough different ways. It's to go get in the market, do things and then the actual insight is like, figure out the fastest path to test the waters. I'll do a startup analogy here since I did one earlier. I see this all the time with YC founders and venture backed founders, you know, coming from the best schools, from the best companies. They'll do things when they raise, because startup founders, we just like fund managers, we also need to raise some really sophisticated allocators. They'll say things like, well, I need to first raise from you know, XYZ prestigious VC, that's, that's the first allocator, I'm going to take. I'm not going to take friends and family or I need to leave room for them, or I need to plan for that and it's, it's actually completely wrong. And a lot of great VCs and programs like YC help beat that out of you or try to. It's a very intuitive thing, I think, to feel but it's wrong and I think the same is true for private funds. It's all about momentum, it's about getting out there. So you are better off if you can get money from friends and family, take it and get in the market and start building a track record and then when you go to the serious allocators, you're probably better off anyways, because you say, look, these people already gave me money, and I'm already operating. And that's almost always more attractive looking and more legitimate and more useful than if you're like, hey, you're going to be the first one, right? So just get moving, don't trip, don't go so fast, do something stupid, but don't have any sort of like, I need to wait for this future hypothetical event that hasn't yet happened, whatever type of thing.

Kevin Fu  

The other thing that's related to that is, and we talked about this at the very beginning, but I can't emphasize this enough, like, figure out how to synthetically proxy a real race. Don't just handshake, get a letter of intent, make a contract, that contract doesn't have to literally even do anything legally, in the sense that obviously, like, if an LP doesn't give you money, what are you going to do, sue your LP, of course, not right. But like, get them so that you're so, you're 99% sure the money is actually gonna come in and it's not just a useful exercise for you to have the confidence that you actually launch with the seed capital, you think you will. But it's a really great test of actually understanding if what you're putting into the market is working. 

Kevin Fu  

There's a really similar concept that startups use, called a handshake, where obviously, you have similar shapes of problems where you need to get commitments, but it might be pre fundraising. So you'll literally send an email, and you'll describe the terms you'll say, hey, this is like it's like, almost cheesy. You're like, this is Kevin from XYZ company and I'm confirming that we had a discussion on this date and you're going to come into my company for this amount of money, at this date subject to these terms and we're handshaking on that right now, like, please confirm via email. And it seems a little bit cheesy, but guess what, everyone who responds and says, yeah, I'm handshaking with you, they actually give you the money and the people who don't say that, a lot of them don't. And so just figure out how you can make things as real as possible, even when it's not yet real. And I think that will be so helpful for you and it will also give you feedback, because a lot of people you think are yeses will turn into nos. And then you can figure out why you can refine your pitch, you can talk to them and ask them what's changed, what caused that delta and then you can become better, you can become more formidable, you can become more successful, you can increase your odds of fundraising, through that iterative feedback process. It's just maybe to sum it up, like, make things real as fast as you can and don't come up with excuses not to do that. I think people are afraid to ask the hard questions like, oh, no, I didn't like sign an LOI or I didn't ask like officially, for sure, but like we had a great chat. Right think about it, you've almost certainly done that, anyone who's listening that's done any sort of plan, you're just lying to yourself and it's not a criticism of you, it's just like, just make it real man.

Ryan Miller  

Brilliant. Yeah, I'm a big fan of the LOI approach, it's non, a letter of intent, for those who may not know it's non legally binding. But there's something psychological about asking someone, click, click, here's the pen, please sign. Even if it's not legally binding, most people are like, if they really are like, not, I, this actually sounds pretty cool, I think I'm gonna do it. Even though it's not legally binding, if they actually signed to your point, odds are they will actually sign when your sub, subscription documents and everything are done and the actual binding contracts get put in front of them. They're like, yeah, I've already signed one now we'll actually sign the real one, so I absolutely love that. So before we wrap things up, final thoughts, is there anything else you'd like our fans around the world to know, ways to contact you websites to go to anything at all? 

Kevin Fu  

Yeah, I mean, you know, I hope this has been helpful, first of all, and you know, we haven't talked much about Repool. So I will take the opportunity to do the little plug, but I think a lot of managers are really happy when they launch with Repool, because there are a bunch of unique things we're doing. I hope that you get some sense that we're quite competent and we also have a much more end to end set of knowledge. And so we can be a much closer partner to you than some siloed single service provider that can only talk to you about a specific function whose entire support staff is offshore. We're onshore only, we're a small team, but we have brought together some of the brightest minds. Our Managing Director of fund admin was the Chief Business Officer at Northern Trust for 10 years overseeing, 

Ryan Miller  

That's huge. 

Kevin Fu  

I think, close to a trillion in client assets. So we brought together a really great team, and look in candor, we're early stage player and we're gonna hustle and be a great partner and we're not going to work with funds that are bad because this is a real or a bad fit rather, because this is a very reputational space. So if you are considering a serious open ended fund launch, then we would love to chat. That's the ask, and we will work with you in any way we can and will be helpful even if we can't work with you. I really believe in spreading around knowledge and success and the worst case, it does nothing for you. But in many cases, it comes back and you get some karma type thing or whatever, right, so there's that. And then the other is if you're an existing fund and you want to level up your back office, we'd love to chat and we're not going to be salesy or press you on it. We'd love to get your feedback, we'd love to see if we can help you level up your LP partnership and experience. 

Kevin Fu  

As a helpful note, we do also try and publish content that we have found and heard from people who have launched funds, was hard to gain access to without talking to lawyers, and other esoteric service providers. So if you go to repool.com/guides, as an example, we posted overviews of the Investment Advisors Act, the Investment Company Act and Securities Act of 1933, all in the context of launching a private fund which are relevant to any private fund launch, and try to tailor the information writing and scoping to what's specifically helpful for an emerging manager. So those are my plugs, otherwise, feel free to hit me up anytime, LinkedIn kevin@repool.com, check us out and then otherwise, you know, Ryan, I'm really grateful to have had the opportunity to appear on the pod. Like I said, being a longtime listener and so finally getting a chance to spread, to hopefully, even one tiny thing of all the things I've rambled about today, that was helpful, I think is a pleasure. And hopefully your viewers have enjoyed some of what I've had to say today.

Ryan Miller  

Perfect. So just to summarize everything, make sure that you understand the difference 506 B versus 506 C and even by extension, just understand the regulations. This is a regulated industry, please run a clean shop and just follow the regulations and stay on top of them because you never know some of them are coming out that are pretty cool that will help you. Like Kevin said, 506 C, it's kind of a new development, it's been around a little bit but it can help you to raise a lot of money so stay on top of these things. The other one is, test the waters, get an LOI, just get people to sign something, you do these things, and you too will be well on your way in your pursuit of Making Billions.

Ryan Miller  

Wow, what a show, I hope you enjoyed this episode as much as I did. Now if you haven't done so already, be sure to leave a comment and review on new ideas and guests you want me to bring on for future episodes. Plus, why don't you head over to YouTube and see extra takes while you get to know our guests even better and make sure to come back for our next episode where we dive even deeper into the people, the process and the perspectives of both investors and founders. Until then, my friends, stay hungry, focus on your goals and keep grinding towards your dream of Making Billions.