Emerging managers draw praise, advice from LPs, colleagues

While younger buyout funds may face challenges launching their business, limited partners at the PartnerConnect West conference this month said they’re interested in adding them to their portfolio. The LPs shared advice on what it takes for first-timers to attract commitments from investors.

John Chiang, Treasurer of the State of California and a member of the boards of the California Public Employees’ Retirement System and the California State Teachers’ Retirement System, said emerging managers remain in the mix despite efforts by the pension systems to pare down the number of its GP relationships.

“We think they’re very important,” Chiang said during his keynote address on October 14. “Obviously you want to create innovation, you want to create opportunity. It’s the seed capital of the future.”

One way to make inroads with the two giant pension systems is by attending public hearings and reaching out to staff members to begin a conversation, he said.

CalPERS recently set aside $500 million for managers raising their first or second fund, for deployment over the next five years. It also allocated an additional $2 billion for GPs graduating from CalPERS’ existing emerging manager program, overseen by GCM Grosvenor.

Chris Pettia, a portfolio advisor with DuPont Capital Management, said the LP has been keeping its own database of emerging managers since 1989.

“Smaller managers have outperformed larger ones,” he said. “Where we’ve made mistakes is when smaller funds trade up. We like operational-focused managers who take a hands-on approach. That strategy is not scalable when you get to a larger fund size.”

The big challenge is getting to your first closing, but after that, LPs will sell other investors in their network on your fund, Pettia said. He urged new managers to be transparent about their track record. If deals are left out, it raises red flags, he said.

Steve Hartt, a senior vice president with Meketa Investment Group, sounded a similar warning. GPs need to match their firm’s positioning to their actual past record of deals. “GPs want to differentiate themselves and provide a memorable story to LPs, but if you look at deals they’ve actually done it feels like the strategy is pasted on after the fact,” Hartt said.

FLAG Capital Management focuses exclusively on smaller funds nowadays after investing in larger funds in the past, said Partner Scott Reed. “We agree that the smaller end is less efficient and the most attractive,” he said. “We spend all of our time there now.”

Shared experience

Several managers, including some first-timers, talked at the conference about their experiences as early managers. Katherine Dowling, a managing director with Luminate Capital Partners, a newer private equity firm, said emerging managers will stand out to LPs if they have their house in order and stand up to tough questions about track record.

Ingrid Mazul, partner and co-founder of ClearPoint Investment Partners, said her firm is a first-time fund, but the team members aren’t first-time investors. LPs want to know about past deals, but they’re also interested in finding out if key people in the firm work well together, she said.

And Bill Nordlund, managing director with Panda Power Funds, said the level of scrutiny demanded by LPs is at an all-time high, and competition is at an all time high.

“The place to start is to be totally transparent by oversupplying information and answering questions,” Nordlund said. Overall, younger funds continue to work hard to establish themselves, he said.

“You have no room for failure,” Nordlund said. “You have to knock it out of the park.”

The comments on emerging managers came during various panel presentations during Buyouts Insider’s PartnerConnect West conference, which was held in Half Moon Bay, California, on October 13 and 14.