Capital Introduction: A Quick Guide

Fact-checked by Steven Grabowski (Co-head of Capital Introduction)

Capital introduction, or cap intro, is an integral service in the alternative investment management industry and particularly in the hedge fund industry. At the highest level, cap intro is about connecting hedge funds, other alternative investment strategies, and managers with institutional investors like family offices, endowments, foundations, investment consultants, and pension funds. The goal is to make meaningful introductions that can lead to large capital allocations. In this article, we will cover the basics of capital introduction, what the process entails, the types of investors, cap intro events, costs, and regulatory requirements.

What is Capital Introduction?

Capital introduction services are often offered by prime brokers investment banks and outsourced trading firms as part of their overall product suite. These services help hedge funds and other alternative investment and asset managers raise capital by connecting them with strategic investors.

Prime brokerage services include a range of support functions for hedge funds including trade execution, clearing, custody, risk management, and operational support. Within this integrated platform approach, capital introduction is a value-add service that can help a fund to attract new capital.

How does Capital Introduction Work?

While the focus is often on a hedge fund or alternative investment manager getting connected to high quality investors, a comprehensive approach to capital introduction is a thorough process.

The relationship between an investment manager and their capital introduction team(s) often begins before the investment strategy of a firm is launched known as the pre-launch stage. At this stage, the focus is on developing a successful capital raising strategy. Through frequent and in-depth interactions with the investment managers, successful capital introduction teams develop a deep understanding of the investment manager’s strategy. Experienced capital introduction teams can help identify target markets of potential investors and provide feedback on messaging (pitches and presentation materials).

With the strategy in place, the capital introduction team’s role is to execute its defined role by reaching out to the types of investors desired by the investment manager. The main goal here is to create interest in the investment manager/strategy from investors where there is little to no existing relationship. Connecting interested investors to investment managers greatly increases the chance of a long-term relationship being solidified through an investment.

The capital introduction process is ongoing. Strong capital introduction teams will solicit feedback from potential investors to share with their investment manager. Often that feedback is crucial to understanding how a manager’s messaging is being received by investors. As successful capital introduction teams are constantly developing new relationships with investors, the opportunity to make connections is a continual one.

Who are the Potential Investors Being Introduced to Investment Managers?

There are many types of potential investors including:

• Seed or early-stage investment firms
• Endowments and foundations
• Single family and multi-family offices
• Hedge funds of funds
• Investment consulting firms
• Pensions
• Wealth management firms
• High net-worth investors

While it may seem like the simple goal for fund managers is increasing the size of their assets under management, the process is much more intricate. There are numerous considerations that fund managers and investors must take into account throughout a fund’s life cycle.

The overall goal is to find appropriate long-term investors who are strong partners for fund managers.

Early-stage managers may initially target investors who are willing to be day one or seed investors. In addition to capital from firm founders and their friends and family, there are investors who are willing to be early investors in exchange for reduced management fees or shared revenue.

Some larger institutions may be prohibited from or uninterested in investing with smaller funds. Capital introduction teams can help identify managers who are willing to invest in newer and smaller managers in order that they grow and become marketable to additional investors.

What is a Cap Intro Event?

A cap intro event is an event organized by a prime broker or marketing firm where top hedge fund managers, funds and other investment managers can present their strategy and performance to a pre-vetted audience of potential investors. These can be one-on-one meetings, small group sessions, or large conferences.

At a cap intro event, the capital introduction team makes targeted introductions and relationships to facilitate meaningful introductions between fund managers and investors. This is a highly strategic process to match the investment preferences and goals of both parties. Cap intro events are not just about networking; they are designed to make meaningful connections that can lead to real investment discussions and ultimately capital commitments.

Is Capital Introduction Regulated?

Capital introduction is regulated by jurisdiction. In the U.S., the Securities and Exchange Commission (SEC) oversees activities related to securities offerings including those facilitated by prime brokers and capital introduction teams. The professionals providing capital introduction services and their firms are registered as broker dealers and comply with anti-fraud provisions.

Prime brokers and their capital introduction teams need to navigate a complex regulatory landscape to ensure they are compliant with all relevant laws and regulations. This means following rules around marketing and solicitation, anti-money laundering (AML) standards, and investor protection.

How Much Does It Cost?

The cost of capital introduction can vary based on the provider and the business relationship the investment manager has with the organization providing cap intro services. Typically, capital introduction services are part of a full prime brokerage offering, and the fees are bundled with other services like trade execution and custody. Similarly, it is common for a hedge fund manager utilizing a comprehensive outsourced trading relationship to have access to capital introduction as a value added service.

Some prime brokers will charge a flat fee for capital introduction services while others will structure their fees on the success of the introductions and take a percentage of the capital raised. The fee for percentage of capital raised model is far more common among third-party marketing firms.

What Makes a Strong Capital Introduction Offering?

In the competitive prime brokerage and outsourced trading spaces, capital introduction has become a key differentiator. Prime brokerage and outsourced trading teams compete with other firms on the strength of their capital introduction offering just as they do on client service, customization, and pricing.

Prime brokers are continually developing their capital introduction services to meet the changing, market trends and needs and to add value to their clients. This means using technology, data analytics, and deep industry and market knowledge to make targeted and effective introductions.

Capital introduction teams are at the heart of this process. They work closely with fund managers from hedge funds and investors to understand their goals, risk tolerance, and investment criteria. Successful capital introduction teams have developed a deep network of investors and are experienced in helping fund managers with their marketing and capital raising throughout the life cycle of a fund.

StoneX Capital Introduction Offering is Highly Compelling

StoneX has a strong capital introduction team that has significant expertise and experience in helping investment managers succeed in all aspects of their capital raising. We truly enjoy partnering with our investment managers to develop a deep understanding of their teams, strategies, and goals.

We customize our approach based on what our clients want and take a consultative approach knowing that each fund manager is unique. We understand that the respective needs and goals of our managers change over time, and we provide our insight and support over the course of the relationship.

We have developed a deep network of investors of all types and sizes and are constantly developing new relationships with investors. We take great pride in bringing investors and fund managers together where we think both sides will be rewarded for connecting.