Comparing Traditional and Centralized Distribution Agreements for Alternative Investment Products

Why Distribution Agreements Matter in Alternative Investments

Market access remains the cornerstone of success for alternative investment products. Fund managers face critical decisions when structuring their distribution strategy, particularly regarding the implementation of distribution agreements. The landscape has evolved significantly, with traditional bilateral arrangements giving way to more sophisticated centralised models.

The Evolution of Distribution Models

For decades, investment firms relied heavily on traditional distribution agreements to bring their products to market. These one-to-one contractual relationships between product managers and distributors served as the foundation for market access. However, the operational complexities inherent in managing multiple bilateral agreements have prompted many firms to reconsider their approach.

 

Traditional Distribution Agreements

Characteristics of Traditional Distribution Agreements

Traditional distribution agreements operate as bilateral contracts between investment firms and their distributors. These one-to-one agreements establish the specific terms and conditions for product distribution. Key aspects include:

• Customisation: Each agreement requires tailoring to match the individual distributor’s capabilities and market presence.
• Operational Complexity: Mid-sized firms often find managing multiple distribution agreements challenging, particularly given their limited resources.
• Market Access Constraints: Distribution networks typically remain confined to existing relationships, which can restrict broader market penetration.

Process of Traditional Distribution

Investment firms following the traditional distribution path typically proceed through several defined stages. The sequence reflects established industry practices that have evolved through decades of market experience.

Key Process Steps

1. Negotiation Phase: Investment firms engage with each distributor individually to establish terms. These discussions encompass crucial elements including pricing structures, marketing, and compliance frameworks.
2. Agreement Formalisation: Following successful negotiations, parties proceed to execute formal contractual documentation.
3. Market Implementation: Distributors activate their distribution channels, introducing the product to market while adhering to the established contractual framework.
4. Relationship Oversight: Firms maintain active supervision of distributor relationships, monitoring compliance adherence and distribution performance metrics.

Challenges of Traditional Distribution Agreements

The traditional distribution framework presents several operational considerations:

• Resource Requirements: Organisations must dedicate substantial time and resources to negotiate and maintain multiple distribution relationships.
• Market Presence: Distribution effectiveness can vary significantly across partners, potentially affecting consistent market representation.
• Network Growth: Traditional agreement structures may introduce friction in rapid distribution network expansion.

 

Centralised Distribution Agreements

The alternative investment landscape has embraced centralised distribution agreements as a streamlined approach to market access. These arrangements represent a significant departure from traditional bilateral frameworks.

Characteristics of Centralised Distribution Agreements

Centralised distribution operates through a unified contractual framework that governs product distribution across multiple channels. Service providers and consulting partners play a crucial role in this model by:

• Standardising the investment product
• Enhancing bankability
• Facilitating access to international distribution networks including banks, brokerages, and custodians

Key Features

The centralised distribution structure offers three primary advantages:

1. Standardised Documentation: A single, comprehensive set of terms and conditions applies uniformly across all distribution partners, simplifying the management process.
2. Administrative Efficiency: The unified approach significantly reduces administrative workload for investment firms through streamlined operational processes.
3. Enhanced Distribution Reach: Centralised agreements provide access to extensive established networks, considerably expanding potential market penetration opportunities.

Process of Centralised Distribution

The execution of centralised distribution follows a more streamlined operational framework, optimising both efficiency and market access potential.

Core Implementation Steps

The centralised distribution process encompasses four key phases:

1. Partner Selection: Investment firms identify and engage qualified service providers or consulting partners with proven expertise in product standardisation and bankability.
2. Agreement Consolidation: Rather than multiple bilateral contracts, firms establish a single comprehensive agreement covering all distribution channels.
3. Market Access Development: The service provider makes the product bankable, facilitating access to international distribution channels via banks, brokerages, and custodians.
4. Distribution Management: Firms utilise centralised management systems for comprehensive oversight, supported by integrated monitoring and reporting capabilities.

Advantages of Centralised Distribution Agreements

This consolidated approach delivers several operational advantages:

• Operational Efficiency: Organisations significantly reduce resource allocation to negotiation and relationship management functions.
• Market Consistency: The unified framework ensures standardised terms and execution across all distribution channels.
• Growth Capability: Centralised agreements facilitate rapid market expansion through established distribution networks.

 

Making Products Bankable

Product bankability represents a critical element in alternative investment distribution. The process demands specific standardisation to enable broad market access through established financial channels.

Understanding Bankability

The transformation of an investment product into a bankable offering requires comprehensive standardisation of:

• Key documentation
• Operational processes
• Transaction protocols
• Settlement procedures

These enhancements enable the product to be:

• Offered through banking platforms
• Transacted efficiently
• Settled via financial institutions

Bankable products share fundamental characteristics – they maintain standardised structures, operate under clear regulatory frameworks, and provide straightforward access points for a diverse investor base.

 

Conclusion

The distribution landscape for alternative investments continues to evolve, with market access strategies playing an increasingly decisive role in product success. While traditional bilateral agreements offer customisation advantages, they frequently present operational challenges in efficiency and scale. The emergence of centralised distribution frameworks, enhanced through product bankability, delivers a more streamlined approach that resonates with institutional requirements and investor preferences.

For investment firms navigating distribution complexities or seeking to enhance product bankability, exploring centralised solutions may offer meaningful advantages.

Take the Next Step

FundFront specialises in creating bespoke distribution solutions for alternative investment managers. Contact our team to discuss how we can help optimise your distribution strategy. Email us at hello@fundfront.com or fill in our contact form here. 

 

Disclaimer

FundFront provides operational and technological solutions for fund structuring, securitisation and management. We do not provide legal, tax or financial advice. We recommend that you consult with professional legal or financial advisors to ensure compliance and appropriateness for your specific situation.