Emerging managers should emphasize team when fundraising; gird for uphill climb

  • LPs focus on emerging manager team composition
  • Investment strategy also important to LPs
  • Median number of months to raise emerging fund: 17

Are emerging managers in tune with potential backers when it comes to anticipating what factors are most important to those backers in evaluating their funds?

A recent survey by financial publisher Buyouts Insider and Gen II Fund Services, LLC finds that, to a surprising degree, they are.

You would think “track record” would rank high in importance with institutional investors as a factor in evaluating an opportunity. It does, of course. And yet, interestingly, institutional investors rated “composition of team” and “investment strategy” as even more important factors than “track record” when it comes to evaluating emerging manager funds—(see figure 35.)

About nine in 10 investors (90 percent) indicated that “composition of team” is either an extremely or very important factor in the investment decision; 85 percent said the same of “investment strategy.” Track record came in third place out of seven factors rated, at 73 percent.

Asked about the same group of seven factors, about nine in 10 emerging managers (91 percent) anticipated that “composition of team” would be an either extremely or very important factor for limited partners evaluating their funds—(see figure 9.) About eight in 10 (80 percent) indicated “investment strategy” and “track record” to be either extremely or very important factors.

By the same token, emerging managers correctly anticipated what factors ranked as least important to potential backers. It’s hard to find an investor these days that isn’t interested in co-investment opportunities. And yet just 43 percent of investors ranked “co-investment opportunities” as either extremely or very important factors in making an investment decision. An even smaller percentage of emerging managers, 28 percent, believed investors would find this to be an extremely or very important factor in their decision.

All told, Buyouts Insider and Gen II Fund Services surveyed more than 100 emerging managers this spring to learn more about their experiences on the fundraising trail. They grouped respondents into two broad categories— venture capital firms and buyout/corporate finance firms, the latter category including such strategies as buyout, growth equity and distressed debt/turnaround. To learn more about the buy-side of the equation they also surveyed more than 40 institutional investors that have an appetite for emerging managers.

The surveys did nothing to dispel conventional wisdom that it’s an uphill climb for emerging managers seeking to raise money. For those that have closed their latest funds (excluding those with still-open funds), the median number of months it took to raise them was 17 months, or nearly a year and a half—(see figure 17.)

In addition, more than half of all respondents (57 percent) said they offered coinvestment rights as a sweetener to investors; 43 percent offered discounted management fees in return for larger commitments; and 27 percent provided investors with a piece of the management company/general partner. (See figure 10.) Such concessions suggest emerging managers face a discerning fundraising market where investors hold the stronger hand in negotiating terms and conditions.

Nearly four in 10 (39 percent) of all emerging managers surveyed also said they took on an anchor investor with more favorable terms—(see figure 11.) Anchor investors can provide fundraises with much-needed momentum; but potential investors may view the situation unfavorably if they feel the general partner has given away too much of the fund economics to the anchor investor.

The survey of institutional investors, meantime, suggested that emerging managers should expect to take some five meetings with investors before securing a commitment. It can take in the neighborhood of six to 12 months from first introduction to getting a signed commitment. (See figures 33, 34.)

Where is the money coming from for emerging manager funds these days? That is another important question addressed by the emerging manager survey.

For emerging managers that have closed their latest funds, 22 percent of their capital came from family offices, the most of any category, and another 17 percent from money managers/advisors—(see figure 21.) That is consistent with conventional wisdom that family offices are especially open to backing emerging managers; they love getting in on the ground floor of new opportunities others haven’t heard of before.

Public pensions, traditionally the biggest source of money for the PE/VC industry, account for just 11 percent of the money raised— although money managers/advisors may channel money on their behalf.

Action Item: Find the full survey here: http://pages.argosy.group/EMSurvey_WP/

Photo of David Toll