Fundraising for emerging managers is often a protracted affair. Those managers surveyed that had recently closed a fund met with an average of 97 investors in order to do so, at an average of six meetings per commitment, resulting in an average of 33 LPs.
“We invested in a brand new healthcare manager two years ago. I spent an extraordinary amount of time with that team before we committed,” says Claire Kendrick, head of alternative investments at Mill Creek Capital Advisors. “They probably visited me in Pittsburgh five times. I went to their offices. A lot more work goes into investing in emerging managers, and covid has made the process even harder.”The onset of the coronavirus has, of course, made fundraising that much more challenging and it is emerging managers that are feeling the worst effects.
Indeed, over half of emerging managers that are currently on the fundraising trail plan to extend their fundraising period. A further 8 percent have either paused fundraising indefinitely or else abandoned their efforts altogether.
That is not to say that appetite for emerging managers has evaporated. Investors continue to seek alpha in new and undiscovered teams. As the industry has matured and expanded, the caliber of emerging managers has soared. “As we come out of a 10-year bull run, a lot of managers have inevitably gotten larger. Talented people within those teams have grown frustrated and decided to strike out on their own,” says Scott Reed, co-head of US private equity at Aberdeen Standard Investments.
“A lot more work goes into investing in emerging managers and covid has made the process even harder”
Mill Creek Capital Advisors
“When new firms are coming out of well-known partnerships, that gives you confidence. The risks associated with investing in emerging managers have declined substantially.”
Kendrick adds that while around 20 percent of the emerging managers that Mill Creek has backed have “blown up,” this figure is not dramatically below that for established managers. “On the other hand, when emerging managers outperform, they really outperform. I would say nearly 50 percent have done better than we expected,” says Kendrick.
Despite pronounced interest in the emerging manager sector, selecting the right third-party providers is critical for firms raising first and second-time funds. Almost half – 45 percent – of those surveyed that are currently fundraising are using a placement agent, up from 30 percent for those that have already closed.
“That includes partnering with outside vendors who will be a good partner in our early years – and grow with us over time.” Meanwhile, placement, legal and fund admin services were all put in place an average of six months before first close. “While we are a new manager, since day one, we have been focused on building an institutional-quality platform for the long term,” says Bill Hannon, chief financial officer at technology investor Clearhaven Partners.
There should be more consultants that help with storytelling and connections, but the funds are too small for true placement businesses”
When selecting third-party service providers, relevant experience, understandably, ranges from very important to extremely important for 83 percent of managers.
John McCormick, managing director at placement agent Monument Group, adds that it is vital for an emerging manager to ensure they select someone that is going to stick by them throughout the vagaries of a first-time fundraise. “They do as many references on us as we do on them, and that is important,” he says.
Lindel Eakman at the Foundry Group, however, believes that the placement industry inadequately serves the small emerging manager segment. “There are no good placement agents at this end of the market,” he says. “I think there should be more consultants that help with storytelling and connections, but the funds are too small for true placement businesses. Fund admin, on the other hand, is pretty easy, with a few large players that are well proven.”
This article first appeared in sister publication Buyouts Insider