For years, so-called ‘emerging managers’ on the fundraising trail may as well have had the letters ‘FTF’ emblazoned in scarlet across their marketing materials – First Time Fund.

Most investing institutions had neither the desire nor the resources to back small or unproven teams. Now, however, investors increasingly have both.

The term ‘emerging’ is commonly applied to GPs that are experienced but have never worked together, experienced but have never managed a fund, experienced and are ethnic minorities or women, or just experienced but small. However one defines emerging managers, it appears that LP interest in them is growing, especially among large, institutional investors. Some indications:

Pension penchant. Among the many state pensions funds that already have or are developing dedicated emerging manager investment programmes are Colorado's PERA, CalSTERS, New Mexico's public employees pension, the New York City Retirement Systems, the North Carolina state treasury, the Connecticut state treasury, the Los Angeles County pension fund, Massachusetts PRIM, and New York State Teachers, according to industry sources.

Investment manager moves. A number of fund of funds groups are taking advantage of interest in emerging managers with specialised vehicles. The most talked-about among these is Parish Capital, a Durham, North Carolina firm that is raising a $300 million (€250 million) fund targeting ‘small but experienced’ managers. Market sources say Goldman Sachs is close to a first close on an emerging managers vehicle of its own. GKM Newport, a new Los Angeles fund of funds manager, allocates roughly 40 percent of its programme to emerging managers.

M2 reemerges. Muller & Monroe Asset Management, led by Irwin Loud, who built the private equity programme at Florida State Board of Administration, and Andre Rice, the founder of Rice Group, an investment advisor for wealthy individuals, have been preaching the emerging manager gospel since 2001 when they founded their Chicago-based firm and launched fundraising on a vehicle dedicated to the strategy. After three grueling years, a source close to the firm says the fund will likely see a first close later this quarter, largely due to the uptick in demand for newer or non-brand-name funds.

Kelly DePonte, a principal at private equity advisor Probitas Partners, says he has noticed an increase in requests from investors who want to be alerted to first-time funds. He says most of the inquiries are from experienced LPs who realise they need to invest with more innovative and motivated managers. “They would rather support a strong Fund I than Funds III, IV, V after the firm has proven to be mediocre,” he says.

It is an open secret in the industry that many established private equity firms, even in the middle market, have allowed success to bloat their assets under management beyond the original size and strategy in which they first thrived. Recent converts to emerging managers are trying to capture GPs who prowl smaller, less trampled deal terrain. “The major institutions are becoming pretty astute as to competition between GPs,” says Craig Nickels, a partner at Austin, Texas-based Alignment Capital, which conducts due diligence for Colorado's emerging manager programme. “If you pick two buyout groups of $1 billion or more, they're going to see all the same deals. If an institution is invested in Group A and Group B, they're going to be bidding against themselves. [LPs starting emerging manager programmes] are zooming in on, ‘How do I get different deal flow?’”

Nickels notes that good emerging managers are hard to find. The best ones may even bristle at the term ‘emerging,’ as they have been successfully buying, adding value to and selling companies for years, albeit well off the radar screens of most LPs. More due diligence work is required to confirm that the successful deals are actually attributable to the managers, or that successful exits weren't flukes but the result of skill and hard work.

It's easy for LPs to slip into the comfort of a follow-on fund commitment. But the biggest and most successful private equity firms in the world were at one point emerging managers backed by a few astute (and subsequently well rewarded) LPs. The challenge today for investors is to take the harder route and search for a next generation of great firms. Emerging manager programmes can expose LPs to ‘miserable failures,’ as Nickels puts it, but they can also be the best way to access the ambition and talent that will sustain this asset class from one generation to the next.