Gen II: Emerging manager experience matters more than ever for service providers

The pandemic presents significant fundraising challenges for emerging managers; service providers with a strong history of working with those managers will be best positioned to help them navigate the crisis, explains Jeff Gendel, principal at Gen II Fund Services.

This article is sponsored by Gen II Fund Services.

This year’s Emerging Manager Report, published by PEI in partnership with Gen II Fund Services, LLC would be difficult to cover without discussing the covid-19 pandemic, certainly the biggest disruptor to the private equity industry since the 2008 global financial crisis.

After several years of continued growth in the number of new emerging managers and expansion of capital allocated to them by limited partners, market observers are expecting the rate of growth for new emerging managers to decline significantly.

But that has not stopped some aspirational GPs from plowing ahead, replacing the traditional face-to-face meetings and due diligence sessions with Zoom calls. Comforting to these sponsors is the statistic within this year’s survey that reflects nearly 80 percent of investors will not change their allocations to emerging managers despite market gyrations.

It is no surprise for emerging managers that the task of launching a new fund has become more challenging during this current economic climate – everything from fundraising to conducting internal meetings to managing the operations of their nascent businesses comes with a higher hurdle, and the survey reflects this expectation through expanded time to reach a closing.

The survey found that 89 percent of GPs believe emerging managers will face moderate to a great deal of fundraising difficulty due to covid-19 and 51 percent of surveyed GPs will be delaying the launch of a new fund or extending a current fundraise for at least several months.

Sharing the load

Despite the challenges the market currently faces, what has remained consistent year over year is the importance of experience when choosing service providers such as fund administrators, auditors, attorneys and other consultants. The survey shows, for the fourth consecutive year, more than 80 percent of all respondents cited “proven expertise and experience with funds like mine” as the most important attribute when choosing a service provider.

In serving emerging managers for more than 25 years, we have found there is no substitute for prior experience. Given the increased complexity of fund structures and importance of the administrator’s role servicing private equity funds and investors, it is vital that emerging managers partner with a provider that can demonstrate exceptional experience, team continuity and the ability to perform seamlessly in today’s work from home environment.

The best service providers understand the fund’s unique needs and challenges, can seamlessly meet today’s investor requirements, offer proven ability to scale with clients, and can provide expert guidance to the management company and GP entities. And the best path to ensuring your service provider understands these needs is to know that they have extensive experience working with similar emerging managers.

By their very nature, newly forming private equity firms tend to run lean. The principals multi-task, and that requires partnering with experts that can free up the team to focus on raising and deploying capital and managing the firm. An administrator that has a longstanding track record of working with emerging managers to help them navigate the opportunities and challenges of private equity entrepreneurship provides a critical edge for the members of the GP, and a level of comfort for the institutional investor.

At Gen II, we have helped launch more than 60 emerging managers. We intimately understand the imperative of the private equity entrepreneur to know with confidence that their funds will be well-run, that they can rely on us to act as their trusted partner, offering independent and valuable guidance for our clients, over and above the fund administration services we provide.

In addition to our vast experience with fund vehicles of all levels of complexity, Gen II’s expertise extends to administration of management company and GP entities. This valuable service enables the emerging manager to gain the insight of our more than 25 years of working with founders and entrepreneurs on the management of their private equity firms. Our partnership approach to our business relationships is an important differentiator for the emerging managers on Gen II’s platform.

Qualifications are key

For managers investigating an administrator for their fund, it is imperative to look for several specific operational qualifications in addition to the requisite experience. The administrator must have an SSAE 18 (Service Organization Control Type 2 [SOC 1] Statement on Standards for Attestation Engagements No 18) issued by the American Institute of Certified Public Accountants.

This certification marks the passage of a crucial independent examination of the administrator’s control environment and is a requirement for sponsors and their institutional LPs. In fact, every prospective investor in an operational due diligence meeting in which we participate asks about the SSAE 18.

Any potential service provider should also be in compliance with the SEC’s cybersecurity recommendations and be compliant with the General Data Protection Regulation, the California Consumer Protection Act and the New York State Shied Act, as cyber-risk and the security of investor data is top of mind among LPs and GPs. Emerging managers should also expect the administrator to be able to evidence that client-facing items are error-free.

Gen II has met this requirement through the establishment of an internal quality control department, in order to be sure that there is an extra set of eyes reviewing all sensitive and client-facing transactions. The bottom line for any emerging manager is evident: Your fund administrator should enable the sponsor to be able to unconditionally “check all the boxes” that relate to investor operational due diligence.

Experience matters

Focusing on the theme of relevant experience, the GP should review lists of the service provider’s current GP clients to see if there are firms that the GP considers as peer organizations. As the survey indicates, requisite experience with funds similar to those of the sponsor is the most vital consideration. Exceptionally experienced fund administrators will also be able to provide the sponsor with timely market intelligence and benchmarking data from their past work with similar firms. The ability to offer insight into industry best practices is also extremely helpful for those GPs who are new to the principal and firm leadership role. So, while it is crucial for the service provider to evidence deep experience through working with like firms in order to merit consideration, these other highly value-added services provide the important differentiation across service provider sectors.

In the overall analysis, an unwavering focus on private equity fund administration, senior team continuity, client retention rates, proven performance and in-depth industry knowledge are all key considerations, in addition to prior experience, when choosing a fund administrator. These attributes have been long established at Gen II – and they are primary reasons why more emerging managers look to Gen II for their fund administration needs than anyone else in the industry.

At Gen II, we know that extensive fund administration experience, expert teams, a customized approach to each client, SSAE 18 certification, cutting-edge technology, robust cybersecurity and data protection and a true business partner that ensures their funds are well-run are what emerging managers seek. Ultimately, as the survey indicates for the fourth year in a row, relevant experience is at the top of the list. Emerging managers will want that experience working for them.