Emerging managers: New blood? Not just yet

Investor demand for new managers rests on the return of in-person meetings.

Investor appetite for first-time managers dipped in Private Equity International’s LP Perspectives 2022 Study compared with the prior year, a sign that most LPs are sticking with a flight to familiarity, investing in GPs they know and have backed previously.

Findings from the survey revealed that 31 percent of respondents are “just as likely” to commit capital to new managers, a seven percentage point decrease from 2021’s study.

Meanwhile, just 11 percent are “more likely” to back first-time teams, down slightly from the 13 percent in the prior year. It is also worth noting that there are more LPs in the survey this year who say they do not invest in first-time managers (43 percent versus 29 percent last year).

In line with the previous year, about half of LPs are looking to increase their manager relationships over the next year, although this is likely to be with GPs they have crossed paths with in the past.

While there is a lot of dialogue and data in the market of private equity firms blowing past their targets for their latest vehicles, the vast majority of that is a rapid acceleration of existing managers coming back to market, noted Wilf Wilkinson, managing partner at Acanthus Advisers, during an emerging managers conference hosted by Swiss firm Unigestion in November.

“Emerging manager volumes have broadly stayed flat and shrunk over the last couple of years,” he said. “There’s no replacement for an in-person meeting when you are backing someone for the first time. You have to meet that person and build trust.”

Wilkinson also noted that size remains a key barrier for LPs to participate in the emerging manager space. “Most capital for PE globally sits in mega-allocators – public pension funds, large endowments, sovereign wealth funds – most of those cannot invest in a manager smaller than $1 billion and even a billion is at the low end for someone like CalPERS, for example” he said.

What that means is that first-time funds are generally for specialist and smaller groups of LPs, Wilkinson added.

Growing demand

Sarah Sandstrom, head of North America fund placement at Campbell Lutyens, says there is still “a lot of demand” from investors in emerging managers as people or teams spinning out often have great new investment ideas.

“Often, emerging managers also perform very well – there’s a whole segment of the market that is just focused on this space. We have our doors open for these GPs and we choose the best of the best that might become tomorrow’s long-term clients.”

Is it harder then to raise capital for a first-time manager? Sandstrom notes that the era of Zoom has brought a tremendous amount of efficiency in fundraising that has “turbocharged the whole system”.

Yet the biggest challenge is that mandates either have momentum or they don’t. “If you have a mandate with momentum, you’re really able to drive a process through quickly. But if you don’t have momentum, it can be very challenging in this market to attract new capital,” says Sandstrom.

Michael Lindauer, co-CIO of private equity at Allianz Capital Partners, the alternatives manager of German insurer Allianz, says emerging managers make up about a third of its private equity allocation. Part of the manager’s gameplan is what it calls a “shadow portfolio”, in which it sketches out over the next four years GPs it likes and tries to be “proactive as an early closer or first closer”. This ensures it delivers certainty to the GPs in their fundraising, Lindauer tells PEI.

While 2021 might not yet be the year in which LP appetite for new managers bounces back, some are optimistic that pent-up demand will come back in 2022.

“We’re very hopeful that demand for emerging managers will increase next year, but it has to be predicated on getting back to in-person meetings,” says Janet Brooks, a partner at Monument Group. “While LPs have shown that they absolutely can commit to PE virtually, in many or all cases they are doing that when they already know the manager, or they have at least met them at some point previously.

“As in-person meetings start happening again, we’re hopeful there will be an increase. But given how many re-ups a lot of LPs are going to have, especially those with mature programmes, clearly there’s only so much money that can find its way to emerging managers.”