When mega-funds were hot, emerging managers struggled to get on investor radar screens. Now that the megas have lost their mojo, limited partners want to find the next small superstar. But like contestants on “American Idol,” those budding stars often don’t know how to impress the judges.
“A lot of LPs have told me they’re looking for young, hungry, small groups,” said David Berchenbriter, co-founder and partner at BerchWood Partners, a New York City-based placement agency. BerchWood defines emerging managers as those in the process of establishing themselves in the institutional community, which may include those raising their first, second or even third institutional funds. “LPs that once would not even look at a fund of less than $1 billion are now considering $250 million funds,” he said. “That’s where they think the higher returns will come from.”
That’s great if you’re a new or newish group on the hunt for institutional money. But chances are, unless you’re a spinout team, institutional investors won’t know who you are. So how to get the attention of potential LPs?
To succeed, new teams must have a track record based on industry experience, as well as on operating capability. “It used to be that people just bought into stories,” said Berchenbriter, but now LPs take the time to really get to know managers and understand how they add value.
But having a track record and proving it are two different things. “You need to get attribution,” said Berchenbriter, by showing who sourced, transacted, managed and exited the deal. “Ideally, if you’ve spun out from a group, you should get attribution on your track record, but that can be difficult,” he said. You can, however, often verify attribution through the portfolio companies themselves or other investors in the transaction. You then must assemble the information to show LPs and consultants what they want to know, in the way they want it presented.
A new group must also be prepared for close scrutiny of the team itself. LPs will want to get to know the people and the organization, asking if they have the right economics, the right people, and if they are disciplined in managing the firm, as well as their investments.
It’s a tough process to get through, but if someone has the knowledge, experience and track record, they can do it on their own. Otherwise, a placement agent experienced with helping emerging managers just might come in handy.