Art of Negotiation: What to Do When Your Investors Say No

Some of you may be directed here by my YouTube videos on how to start a hedge fund: guide for emerging managers.  This article is written as supplementary information to the second video on hedge fund capital raising, but can also be read alone for anyone who’s frustrated by numerous “NO” from investors.

Before you go into the presentation or negotiation that follows,  I hope you are well-prepared already.  By being prepared, I’m asking you to research your audience, build some alternative options, collect supporting evidence to back up your proposal.

• Number one, research your audience.  Understand what their concerns may be and who the decision maker is.  Are they worried that their spouse/investment committee will be unhappy about the investment decision?  Did one of their newer investment manager just failed? By anticipating what their concerns are, you can come up with better solutions for them.
• Number two, build some alternative options.  If it’s the fee structure that bothers them, is it possible to offer a fee reduction if additional capital commitment is made?  If it’s the liquidation term, is it possible to offer separate managed accounts to them?  For example, if the investor asks for a fee reduction, you may respond by saying “why not put in $1mm first at 10% fee, and then if we produce returns higher than 20% this year, we will match the market practice at 20% fee?”
• Number three, have some supporting evidence to back up your proposal.  Help your investors save face by referring to some standard industry practice, so by agreeing to you, they’re not losing to you, but they’re trying to conduct a fair transaction.  Collect statistics for the fee structure or liquidation term that an investment manager like you has for similar investment program.

Second: disarm them.  Many people are automatically on guard after they say “no” to you.  They expect you to either attack them by persuading them they’re wrong, or give in by agreeing to what they ask for, or simply walk away.  Surprise them by taking none of these reactions.   Disarm them with the magic word yes, and by acknowledging their authority and competence.

• Number one, say “yes” and get as many “yes” from the investors.  For example, you may say something like “yes, you have a good point”, or you can respond calmly by asking “is it correct that you are concerned about the risks involved?” or “are you saying that this investment strategy won’t work in the current economic environment?” People usually calm down when they find the other parties are agreeing with them, rather than confronting them.  You also fulfill human’s deep desire to be understood.  Seeing that their positions have been acknowledged by you, they will be more willing to hear your proposals.
• Number two, acknowledge their authority and competence.  When you explain why the prospect should invest in your fund after he says “no”, he may think that you are saying he’s wrong or incompetent.  To reassure him that you are not challenging him personally, start with something like “with your years of experience in the industry” or “I know you’ve talked to lots of new managers, and you were referred to me since you are a well-known expert”.

After disarming them, you still need to present your ideas, and you need to do it without provoking.  Try the following techniques:

• Number one, avoid using “but”, say “yes, and…” to build on your idea.  For example, when your investor says your fee is too high, you could say: “yes, you are correct that our fee is high, and that extra fee charge buys you a higher quality investment management, greater transparency and better services” or, if they challenge the redemption term, respond calmly by answering:  “yes, your fund is locked up for one year, and that helps preventing investors loss from fire sale to fulfill redemption request because the investment portfolio is highly illiquid.”
• Number two, instead of proposing with a yes/no question, make it harder to reject by asking an open ended question.  Suggest by asking “what if we do this?” or “why not invest $500k first and then if our fund is living up to your expectation at year end, put in more funding?”

Negotiation can be a full course by itself.   Hope these tips can help you deal with some of the difficult situations.  You may find another article helpful as well: What Are Asset Allocators Looking For in a Start-up Fund?  Happy reading!