Adding Value Through Emerging Managers

In a rapidly evolving landscape marked by numerous re-ups and continuation funds, incorporating emerging managers into investment considerations can yield substantial value for private equity investors.

However, limited partners (LPs) frequently gravitate to larger, better-known fund managers. Paul Newsome, Unigestion’s head of investment solutions, believes it can sometimes be a mistake for investors to get into too many re-ups.

“Just because one fund is in the top quartile does not guarantee the next one will. I think investors need to get out of their comfort zone. They need to look at new opportunities, do their due diligence and see where the returns in the future will come from.”

Christine Winslow, managing director at New York-based Grafine Partners, a boutique asset management firm that provides deal flow to capital partners from emerging managers, shares the same sentiment. Winslow believes that solely relying on re-ups — and not emerging managers — could potentially harm the performance record of the asset class.

“Industry specialization continues to be a trend,” says Joncarlo Mark, founder of Upwelling Capital. “LPs are also looking for emerging managers with great track records and prestigious careers. LPs get excited about backing new, well-aligned and hungry teams they can grow with.”

“Mega firms are generally more focused on asset gathering while returns have become a secondary objective. Emerging managers on the other hand are laser-focused on generating high returns on their deals to build their track records and firms. They have much more of a vested interest so the alignment with LPs is much stronger,” she says.

When evaluating emerging managers, LPs frequently prioritize industry specialization as a crucial aspect of these firms’ distinctive value proposition.

“Industry specialization continues to be a trend,” says Joncarlo Mark, founder of Upwelling Capital. “LPs are also looking for emerging managers with great track records and prestigious careers. LPs get excited about backing new, well-aligned and hungry teams they can grow with.”

Outsourcing is assuming a more prominent role among emerging managers, enabling them to concentrate on their core capabilities. By delegating certain tasks or functions to external service providers, emerging managers can streamline their operations and allocate resources more efficiently. This strategic approach allows them to dedicate their expertise and attention to the areas where they can deliver the most value, ultimately enhancing their competitive advantage in the market.

Maria Dramalioti-Taylor, a partner at London-based Beacon Capital, a tech early-stage emerging manager, says the firm has “outsourced anything that is non-core from day one so that we can focus on what we do best.”

“We built our ‘supplier and tech stack’ [from] best-in-class third-party providers and applications. We then customized only parts of the tech stack where we needed to incorporate our origination and sourcing data models,” she adds.

Dramalioti-Taylor has noticed some “softening” in LP interest and commitments toward emerging managers, indicating a slight decline in appetite.

Nevertheless, LPs venturing into the emerging manager space have an opportunity to gain an advantage, particularly as most capital continues to flow toward larger asset managers. According to Newsome, emerging managers who concentrate on the smaller end of the market encounter less competition when pursuing deals. Consequently, these emerging managers can negotiate lower prices and enjoy greater upside potential. This shift is highly favorable for LPs, providing them with a welcome change during these uncertain times.

To learn more, download our latest white paper, Emerging Managers vs. Re-ups, here.