Buyouts Emerging Manager Survey 2023: Seven takeaways

Describing the current climate for private markets, the one word that managers aren’t using is “easy”. After a rough fundraising climate last year, for emerging managers it only got rougher this year. According to Buyouts data, first-time funds only raised $6 billion globally in the first quarter of 2023, after raising $67 billion all of last year. And GPs of all kinds are spending more time fundraising. They spent a new record average of 13.4 months on the road as they tried to close funds, according to Buyouts data.

That’s the backdrop for the seventh annual Buyouts Emerging Managers Survey, conducted in partnership with Gen II Fund Services LLC and now available for download. LPs are raising the standards for emerging managers, but still willing to commit capital to those with the right mix of team, strategy and, above all, track record. 

It’s a complex picture, shaped by larger market forces, and no doubt recent regulatory moves by the SEC. However, plenty of GPs have made their names by “emerging” from forbidding economic conditions to become the next generation of marquee firms.

Reality check

One of the primary purposes of this report is to dig past the headline fundraising tallies and discover what’s behind the numbers. But it would be remiss not to acknowledge them. 

Some respondents might be all doom and gloom, but in 2023, 22 percent of LP respondents said they backed 6 or more emerging managers, up from only 6 percent last year. But there were declines among LPs backing one to five managers. And that 22 percent does not indicate how many of those emerging managers featured a team-up of marquee players. 

Track record trumps all

As it turns out, GPs might be better at mind-reading than expected. LPs agree that track record and team composition are by the far the biggest factor in selecting emerging managers, with investment strategy again clocking in third, substantiating the idea that investor sentiment might be quite conservative these days. But will investment strategy climb up the agenda as market conditions improve? 

Rationalizing commitments

When GPs discuss why an LP did or didn’t invest, there will always be an element of guesswork. And if they did commit, it might not be because of a bulletproof PPM, but rather because the opportunity was the right fit. 

Here we find that track record is cited as the most important factor, followed closely behind composition of the team, which is another way of gauging the track record of the individual partners. Meanwhile, investment strategy comes third, which argues that established managers do in fact have the edge. 

The pressure cooker

Macroeconomic volatility is the new normal, and GPs don’t expect the climate to get any friendlier to investment performance, which is the biggest factor in the fate of any manager. Interest rate hikes, a recession in core markets and high inflation were the top three concerns, but stock market volatility and geopolitical uncertainty weren’t that far behind. In short, respondents know what they don’t know, and it’s keeping them up at night. 

Emerging issues 

When asked about the key challenges to raising a debut fund, emerging managers stayed consistent, citing competition with more experience managers as the number one issue, and that tally has to include a lack of track record, brand awareness and the unwillingness to take on additional risk, which LPs must consider when backing a younger, unknown group. However, it should be noted that few had any issue complying with data requests or finding LPs without sufficient resources for due diligence. So if anything, today’s tech solutions might actually be helping folks do more with less. 

The need for expertise

When it comes to choosing a service provider, reputation and track record matter most. It’s proven expertise with similar firms that emerging managers deem most important when selecting a service provider, followed by a recommendation from a trusted source. Also taken into account are the provision of strategic advice beyond the core offering, the endorsement of a national or industry group, LP preferences, and a prior relationship.

The blessed few 

Given the competition for funds out there, emerging managers may be right to be pessimistic. Established managers are well-positioned to win commitments even if they are raising their first fund outside of their marquee strategy. The global slowdown in fundraising appears most likely to hit emerging managers the hardest. Unfortunately, LPs don’t have a rosier outlook. They maintain a similar view of a bifurcated market that has established managers easily raising their latest funds or launching new firms, and the rest of the field vying for what’s left.