Ability to innovate drives interest in first-time funds – research

Greater flexibility and higher returns were key reasons to back new fund managers.

First-time fund managers are becoming more popular with limited partners due to their ability to innovate and exploit new sectors, according to research by Intertrust.

A survey of LPs found that 46 percent of LPs are drawn to new managers because they are nimbler and more opportunistic than established firms. More than a third said that new managers were better able to produce focused strategies in areas where there is less competition from other funds.

An ability to produce superior returns was cited by 34 percent of LPs as a reason to invest in first time managers. However, fee discounts commonly offered by first time managers to LPs that invest in a first close, were not a major reason for institutional investors to commit to first time GPs, with only 19 percent citing this as a reason to pick these funds.

However, LPs preferred short-term vehicles for new manager investments, with 30 percent saying they wanted term limits of three to five years, ahead of traditional closed ended funds, which were preferred by 25 percent of respondents.

The biggest challenges to investing in first-time funds were a lack of track record, cited by 80 percent of investors, while 56 percent were concerned about untested fund teams. A significant minority of 38 percent of LPs said there would be greater resource requirements for due diligence and monitoring of first-time funds.

Michael Johnson, director of fund services at Intertrust, said: “Emerging fund managers are occupying an increasingly significant position in the funds industry with investors being more willing to take a bet on an untried partnership.

“While the ability to generate strong returns is crucial, those new managers that make a virtue of being small, nimble and uniquely qualified to pursue a specialist strategy that the larger funds have overlooked are likely to stand the best chance of successfully raising capital.”