Emerging managers fight for their place

In the wake of the health crisis, LPs have favoured the managers they know best when it comes to fundraising. Newcomers face a struggle but may be assisted by co-investments and changes to protocols.

“There has been huge demand for platform expansions from big-brand fund managers, and that’s a threat to smaller, emerging managers.” This quote came from our virtual Women in Private Equity Forum this week, and it was a view that seemed to be widely shared.

One participant, representing a placement agent, spoke of how LPs shut down their private market investing programmes en masse when many countries went into their first lockdowns earlier this year. For some of these LPs at least, this was an attempt to counter what they thought would be the onset of the denominator effect, whereby plunges on the public markets would leave them over-allocated to the private markets.

As it transpired, this did not happen to any significant degree – partly due to the public markets quickly recovering when central banks rode to the rescue, and partly because of the lag in private markets reporting. Once programmes opened again, fundraising quickly recovered – but not for everyone.

What happened was a flight to safety, with the biggest managers boasting a weight of proven know-how and internal infrastructure able to vacuum up investor dollars. For smaller and less proven managers as well as start-ups, the usual long slog to win investor trust was multiplied by the inability to meet face-to-face. Many resigned themselves to a place at the back of the fundraising queue.

While it’s entirely understandable that remote due diligence makes LPs less willing to take a chance on new offerings, there is a concern this will lead inexorably to a lack of portfolio diversity. As a panellist at the Forum observed: “This has not been a great year for the innovative, the exciting and the different.”

But, for such funds, not all hope is lost. One relatively new fund manager spoke of how co-investment has been something of a saviour in terms of winning investors over. This manager knew 2020 would be a big year for re-ups with existing managers and that they would need to fall in line. What they also knew was that there were great new deal opportunities in their part of the market and that LPs – unable to meet up and do in-depth due diligence – could “come along for a co-investment and see what great deals are out there and how we source them and do our underwriting”.

Furthermore, LPs are increasingly concluding that remote due diligence is here for the long term (at the least, it will not disappear completely when more normality returns). Resolving themselves to not being able to meet managers well into 2021, some – we are told – are reviewing protocols that prevent them from committing to managers they are unable to meet in person. The big brands may not have it all their own way after all.

Write to the author at andy.t@peimedia.com