Why there’s still hope for emerging managers

It’s a crowded fundraising market where established names dominate, but start-ups can still grab the attention of LPs wanting to juice up their returns.

With capital constraints making the fundraising environment tougher than ever, a flight to the familiar might be expected, and therefore an uphill battle for emerging managers. Thankfully, for first-time funds, it’s not quite that simple, as revealed in the annual Buyouts Emerging Manager Survey, conducted in partnership with Gen II Fund Services.

Certainly, in a crowded market with an uncertain economic backdrop, there is even more scrutiny from potential investors, and emerging managers face a longer timeline for an expected closing of their first fund.

Meanwhile, more than 40 percent of managers say fundraising has become markedly more challenging since covid struck. Investors appear to have embraced the efficiencies of remote interaction that were forced on them during rolling lockdowns and, despite the removal of travel restrictions, getting in-person meetings remains tough.

Indeed, 71 percent of GP respondents claim that the market is bifurcated, with established managers receiving the bulk of investor interest. Emerging managers also cite allocation constraints and competition from established firms as the biggest challenges they face in the fundraising market. Established managers are taking advantage of this flight to the familiar by launching new strategies, which many investors include in their definitions of emerging managers, detracting attention from independent start-ups.

But the good news for the new kids on the block is that savvy investors view emerging managers as a route to superior returns, with over half of respondents agreeing that the risk/return profile for emerging managers versus established managers is attractive.

It’s clear that pedigree counts, however. Almost 80 percent of LP respondents said they were likely or very likely to back a team that had emerged from a larger sponsor, making spinouts the most popular type of emerging manager.

For OceanSound, which closed the largest Latino-led first-time fund ever, the respected backgrounds of the team led to some anchor capital commitments, pre-covid, which allowed them to begin making investments during 2020. “Those investments were critical proof points of what we stood for as a firm,” co-founder Joe Benavides recalls.

So the irony is that being established is a vital quality, even for emerging managers. But for those that tick investor boxes, the message of the survey is that there is still capital to be allocated – even in these more challenging times.

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