An Investment Framework: Partnering with a Manager—PART 2

Why managed syndicates are better for individual investors

~By Michael Schmanske

Okay so we’ve covered “What are Managed Syndicates?”  How about “Why are Managed Syndicates?”  For Investors in early stage startups you have a choice: Go alone or with a group.  If you are a High Net Worth individual and have the liquidity to invest and manage investments with $250,000 lump sum minimums, you might choose to go it alone.  (I’ll discuss shortly why you may still want to invest with a group.)  But the vast majority of successful professionals investing in private equity would likely rather invest in a portfolio of companies rather than placing all their eggs in one basket.  For most of us we should pool our resources as a syndicate and utilize SPV’s to meet investment minimums.

“Skinny” Syndicates redux

If you have not already I recommend reading or at least skimming the three prior articles in this series:

• An Investment Framework: Decision-making as a Process
• An Investment Framework: Structure and Terminology
• An Investment Framework: Partnering with a Manager—Part 1

So Skinny Syndicates—those without management wrappers.  They generally charge lower fees, but provide no investor (or company) support.  The investment vehicle does not include a management team leading to “fire and forget” behavior.  Once created, the management company has no budget to support investment follow-up or company support.

Many investors have invested in Skinny Syndicates for real estate or other revenue generating assets.  If you read the fine print you’ll find the GP, the management company or advisory team is being well compensated via the revenue stream (rents, royalties, etc) before earnings are distributed to investors. So while the top line fee seems low, the embedded cost framework is actually quite high. By the way: Mutual funds and others do the same. Transaction costs and some other expenses like research are paid by the investment portfolio not by the management team.

You get what you pay for

AngelMD launched managed syndicates in 2022. Wait for it…

We are charging fees.  It is the right thing to do.  By creating a structure with an Administrative and Portfolio Manager fee wrap, the vehicle assumes greater responsibility for investor relations, company updates and direct company support via the AngelMD network.  Let’s unpack that…

Fees:  AngelMD will be collecting fees to support important service improvements: 10% in total and 15% carry.  That’s it.  Full stop.  The 10% is for the life of the investment and is distributed as 2%/yr for the first three years and 0.40%/yr for ten years.  When an exit is achieved, non-distributed fees are returned to the investors (The LP’s).  These fees are slightly higher than Skinny Syndicates, but lower than most, if not all, managed funds.

Investor Relations representation to syndicate LP’s including annual reports, quarterly updates and timely tax documents.  Anyone that has invested via a startup syndicate is likely familiar with the frustration or confusion due to lack of communication with company management.  Tax time? Fahgettaboudit.  At AngelMD, tax season is a misery for us.  Our suffering COO Jen Arthur gets the unenviable and unrewarded job of cajoling the many startups to provide annual reporting documents to the syndicate administrator so they may provide relevant tax filing paperwork to the investors.  An administrative fee allows us to budget an Investor Relations representative.  No longer will LP’s feel in the dark about how their investment is doing, any updates on valuation or progress to an investment exit.

Active Startup support and communications between the startup and the AngelMD expert Network.  Every Managed syndicate will include a requirement that a representative of the AngelMD Clinical Advisory Board will join company board meetings and maintain a continuous line of communication with company management.  The cool part of this is that doctors often want to join these startups.  It satisfies monetary, intellectual and career goals.  For their part the companies would normally have to pay a headhunter to find an interested expert in their specialty.  We work with company management to find a key opinion leader in our network that they will find valuable as an ongoing advisor.

By supporting a PM team and board seat, the company will have ongoing senior level connectivity to the valuable AngelMD expert Network.  If a company requires advice, connections, trial or distribution support—or help with any other issue that comes up—they have a BatPhone that dials directly to the Clinicians in our network.  This is a big benefit to startups.  But in the end it is also a boon to the investors themselves.  It is also why larger investors have expressed interest in our structure.  Even a large Asset Manager or Family Office can unlock significant value investing side by side with our network.

I like to (over)use metaphors. I often call our doctors and our advisors the “sherpas” for companies as they climb the entrepreneurial mountain. I also like to compare our Syndicates to Conestoga wagon trains.  Join the train with the most experienced fellow travelers and the most capable guides.  It is the best way to forge ahead through unknown landscapes and reach the land of plenty.

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