Emerging managers dream big

A record crowd gathered in Austin, Texas, recently to discuss the future of emerging managers amid an investment climate that could dampen strong returns delivered by smaller firms.

The Emerging Manager Conference, hosted by the Teacher Retirement System of Texas (TRS), drew 1,200 attendees on January 13, up from about 100 when it debuted several years ago.

Britt Harris, chief investment officer of TRS, noted that the system’s emerging manager program now boasts 150 managers, up tenfold from its launch in 2005. Overall, the portfolio has generated annual returns of about 12 percent, Harris said.

The strong performance has TRS looking to grow its program even more. Chairman David Kelly said TRS plans to invest $1.3 billion over the next three years in emerging managers, which the system defines as any manager with under $2 billion in assets under management. The emerging manager program, which includes private equity, hedge funds, real estate, fixed income and public equities, currently manages about $1.1 billion.

TRS also will provide follow-up commitments of up to $50 million to emerging managers and work to streamline its due diligence approach, with responses within 90 days on investment decisions, Kelly said.

The Employee Retirement System of Texas (ERS) is also bullish about emerging managers. “We need good managers that can help us survive and continue to provide competitive risk-adjusted rates of return,” said Chief Investment Officer Tom Tull, one of several featured speakers at the conference, which was sponsored by GCM Grosvenor and Rock Creek.

Tull said managers face headwinds from China, oil prices, the Middle East and worldwide economic growth, all of which have caused a sharp sell-off in financial markets around the globe in recent months. “We’ve had some good times, but it’s different going through a slowdown,” he said.

Tull expects challenges to continue in the near future with stressed markets, as well as pressure on fees and increased barriers of entry to new managers.

On the plus side, “tremendous opportunities” may present themselves to emerging managers because public pension funds, endowments, foundations and other LPs continue to increase their commitments, Tull noted.

Impact touted

Attendees at the event said they were pleased to see the bigger turnout this year and pondered some of the themes around an economic slowdown.

Warren Henderson, managing partner of advisory firm Mosaic, said the conference helps raise the profile of the smaller players in the industry that often deliver stronger returns than larger rivals.

“I’m encouraged by the fact that the people in this room outperform the big box stores in the investing world,” Henderson said. “The emphasis on smaller firms is like a bottom-up way of looking at the investing.”

Mags Hardarottir, director of investor relations at Lateral Investment Management, said she attended the emerging manager event for the first time after her credit-oriented firm launched last year with veterans of Highland Capital Partners and White Oak Global Advisors.

Hardarottir said she’s confident any economic downturn won’t be as severe as 2008-2009. In fact, Lateral Investment is “well positioned,” she said, noting: “More companies may need loans if the economy weakens.”

Bruce Pflaum, managing partner of EverStream Capital Management, said the conference offers the opportunity to reconnect with LPs and talk about issues such as investing too much money with one GP. Up-and-coming managers may offer a way to counteract this concern, Pflaum said.

David Robinson of Admiral Capital Group and Hall of Fame basketball player, said he’s been coming to the conference for a couple of years. Teaming up with Goldman Sachs veteran Daniel Bassichis, Admiral Capital arose out of charity work Robinson had been doing as an NBA player. The firm focuses on investments in value-added real estate — properties facing operational challenges — and donates a portion of its income on deals to local communities.

“I love the energy here,” Robinson said. “It’s a great way to get to know the business.”

ERS’s Tull joked that if the conference keeps growing, it may need to be moved from the Austin Convention Center to the nearby Texas Memorial Stadium, which has 100,000 seats.

Action Item: The TRS emerging manager program can be reached at ERSReferrals@gcmlp.com.

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