- Why this is important: Raising a first-time fund is hard. Emerging managers need all the advice they can get from LPs.
You need to go all in if you want to shine through as an emerging manager in today’s hyper-competitive environment.
“We look for people that are all in with skin in the game,” Ethan Levine, a managing director at Commonfund Capital, said at Buyouts Insider’s Emerging Manager Connect East conference on July 26. “It’s critical. It’s not an easy leap of faith, but if you see people believing in themselves, it goes to the firm’s long-term stability.”
In other words, in order for an LP to take on the risk of backing an emerging manager, first and foremost, the LP needs to see that the team members believe in themselves and their own ideas, Levine said.
One of the simplest ways to measure firm stability, Levine said, is by looking at GPs’ willingness to commit when marketing a first fund: “Actually putting money behind that, whether investing [in a lease] for office space or an actual deal — to me — that’s skin in the game.”
Former Apollo Global Management execs Stan Parker and Jordan Zaken put up $30 million of their own money when they raised their first fund for Gamut Capital Management. Gamut set out to raise $500 million, but ultimately closed on $1 billion for its debut.
“I would say it is very important [to see a financial commitment from a GP],” Parker said in a keynote talk at the emerging manager conference. As a GP, Parker said he expects to see senior operating executives who are joining portfolio companies invest a meaningful amount of their own capital in the company to demonstrate their commitment to success.
On the other hand, LPs are also looking for red flags that indicate that a team might not be cohesive. For example, if a new manager has partners in separate offices across the country, that creates a difficult dynamic from the beginning, said Matthew Coyne, vice president at TorreyCove Capital Partners.
“There’s something to the fact that walking by someone and talking about a deal adds value,” Coyne said.
Levine of Commonfund agreed. Oftentimes multiple offices are an early indication that the partners are “going halfway,” he said. For instance, the partners might be retaining their old jobs as they wait to see if they can really raise a fund, he said.
It is a given that an LP will examine quantitative factors such as a strong track record, but also “we focus heavily on qualitative factors,” said Marcin Szajda, a director at Brooke Private Equity Associates.
One critical factor Szajda looks for in emerging managers is the ability to form a true partnership with the GP. In his view, that comes largely through having the access to actively help a GP reach the close of their first fund, as well as opportunities to co-invest, among other things.
For example, emerging managers should be receptive to guidance from LPs on matters of what a data room should look like or the documents needed ahead of a first close, Szajda said.
Taking a “deal by deal” approach can also prove effective when raising a first fund. Szajda encouraged emerging managers to start building a pipeline of investment opportunities early on, since having “really juicy deals to discuss and see in your portfolio” gets LPs excited.
At the same time, a GP shouldn’t try to time “deal one” with “close one” and “deal two” with “close two,” he said. “Just do deals,” Szajda said. “We have seen that if emerging managers are able to do this … the fund will come.”
Action Item: Ethan Levine of Commonfund Capital can be reached at email@example.com; Matthew Coyne of TorreyCove Capital Partners can be reached at firstname.lastname@example.org; and Marcin Szajda of Brooke Private Equity Associates can be reached at email@example.com.