Despite the billions set aside for private equity emerging manager programs, finding backers is still extremely tough for new groups. And it’s only getting tougher in an environment where the credit crunch and the dead IPO market are wreaking havoc on buyout returns. So who gets these dollars and how?
Altogether, Buyouts has identified at least eight institutional investors with emerging manager programs, as well as a dozen or so advisors that make a specialty of advising them on their selection—see table. Altogether at least $4.5 billion has been allocated for the purpose.
One thing for emerging managers to recognize early on is that institutions with these programs don’t necessarily define them the same way or have the same goals. For some, such as the
Beyond those differences, some investors actually define the term “emerging managers” in a way that precludes many groups from getting money. Peter Haabestad, a former investment banker at
Investors have also grown more selective when choosing emerging managers, given a credit crunch that has made many investment strategies obsolete. New firms face an environment of less leverage and little or negative income growth. They need to almost always show up at an investor’s door with an operations team, not just a strategy of “buy and hold until the market is willing to pay you a higher multiple than you paid six months prior,” said Dan Vene, a vice president with
How To Clear It
For their part, many investors say they’re surprised by the chutzpah of groups that show up trying to raise a first-time fund.
The main culprits appear to be investment bankers, consultants and hedge fund managers. “Investment bankers have been selling deals to funds and see how lucrative it can be,” said Russell Pennoyer of
The first step for many emerging managers is to get feedback from placement agents, communications consultants and even potential anchor investors, all of whom can provide an unvarnished view as to whether the concept has a chance. The story must make sense and offer something appealing, “and that’s often hard for people to figure out on their own,” said Pennoyer, noting that it can sometimes take years before a firm is ready to go to market.
That hurdle crossed, most new fund managers find that investors, even those with emerging manager programs, will only back experienced investment teams. Some of the questions would-be backers ask when deciding whom to include in their programs are: Have these people worked together before? Has the team invested together before? Is there a lot of turnover in the team? One example of a group whose experience working together clearly helped their fundraising is
One way to build a track record, of course, is to do one-off deals with one-off financing. Doing so, a firm can eventually accumulate enough of a track record to attract institutional money. Todd Robichaux and Doug Wheat formed Dallas-based
Along with a track record, groups that have already attracted some money from backers tend to have a much easier time getting more from an emerging managers program. An obvious starting point is the GP’s own commitment, which placement agents suggest should be a minimum of 5 percent of the fund.
Guardian Capital is also having an easier time on the fundraising trail thanks to anchor investor
A differentiated investment strategy, whether by sector or investment style, and deep industry knowledge and experience, are also essential to raising emerging-manager funds, sources said, because LPs already have so many investments in their portfolio. The emerging managers that are getting the commitments are the “groups that have a well-defined investment strategy consistently applied in a disciplined way with a cohesive team, producing strong realized results,” said Forum Capital Partners’s Stern.
That said, extremely narrow focuses can be a turnoff. Richmond, Va.-based
If a strategy is “too narrow you take a huge risk because the sector can just turn off,” said Grove Street’s Harris. The worst two funds Grove Street invested in during the past 10 years were both industry sector funds, including a buyout fund that had the misfortune to invest in telecom services circa 1999.