Emerging managers offer FOs a path to build alternatives exposure

  • Why this is important: Direct and co-investments come with their own challenges for family offices.



Multigenerational family offices seeking to invest in alternatives might look to emerging managers who deliver desired returns with less complexity, risk and resources than co-investments, direct investments and secondaries.

That’s the upshot of Cambridge Associates’ report “Private Investing for Private Investors.”

FOs should not lament the lack of access to established and prominent funds, the report said. Instead, they should back emerging managers who have overall produced excellent returns, the report said.

Since 2004 emerging managers have dominated the top 10 PE funds by vintage years, the report said. For instance, six of the top 10 PE funds of 2015 vintage were emerging managers.

The story repeats itself in venture, where EMs dominated the top 10 funds by vintage year. Eight of the top 10 VC funds of 2015 vintage were emerging managers, the report said.

“There is a lot of ambition in private equity and venture capital, and emerging managers spinning out from larger firms have the track record and wherewithal to generate high returns,” said Andrea Auerbach, managing director and head of global private investment research at Cambridge.

Additionally, their higher risk profile (compared with established funds) makes emerging managers an ideal fit for family offices who are more risk-taking and entrepreneurial compared with other institutional investors, she said.

The smaller sizes of emerging-manager funds make them accessible because commitment levels are lower; families could also consider pooling resources to invest in these funds, the report said.

“Really, emerging managers give family offices the opportunity to make money with their money,” Auerbach said.

Endowments and foundations with high private-market allocations earned the highest returns over 20 years, the report said.

Institutions with more than 15 percent allocation to private investments earned a mean return of 8.2 percent for the 20 years ended June 30, 2018.

In comparison, institutions with under 15 percent allocation earned a mean of 6.9 percent in returns, and institutions with less than 5 percent allocation to private investments earned a mean of 6.4 percent in returns in that period, the report said.

Action Item: Get your copy of the report here https://bit.ly/2DXiX1w