Small LPs move faster to back emerging managers, and target more: survey

  • Why this is important: Small LPs show strong interest in emerging managers

While most limited partners say they’re willing to back emerging managers, small LPs have larger allocation targets for them in their private equity and venture capital portfolios. They are also faster than large LPs in committing to these managers.

That’s the upshot of Buyouts Insider’s second annual Emerging Manager Report, done in partnership with Gen II Fund Services and presented July 26 at BI’s Emerging Manager Connect conference in New York.

Nearly 40 LPs, including family offices, pension funds, endowments and foundations, participated in the survey.

Almost 86 percent of respondents were open to backing a debut PE/VC fund even though 69 percent had no target allocation for emerging managers in their PE/VC programs.

Of the 31 percent that did, small LPs had a 51 percent allocation target to emerging managers in their PE/VC portfolios, compared with a 20 percent target for the large LPs, the survey said.

Small investors were defined as those who commit less than $100 million to PE/VC and large investors those who commit more.

Small LPs committed higher than large LPs to emerging manager funds. Commitments averaged $27 million from small LPs compared with $23 million from large LPs, the survey said.

In addition, small LPs were nimbler: They took an average of seven months from first introduction to signed commitment, compared with 11 months for large LPs.

More important, small LPs took an average 6.6 meetings, including conference calls, to decide on an emerging manager while large LPs took 9.6 meetings to make up their minds.

Small LPs met an average of 34 emerging managers per year; they intended to back an average of one emerging manager over the next year, the survey said.

Large LPs had a better conversion ratio: They met an average of 51 managers a year and intended to back one in three emerging managers of that group.

Irrespective of their size, LPs wanted similar terms from their investments in emerging managers. Almost 70 percent wanted LP advisory committee participation, 54 percent looked for discounted management fees based on commitment size, and 45 percent wanted contractual co-investment rights.

The composition of the emerging manager team was the most important factor for nearly 68 percent of all LPs. Almost 60 percent of LPs also considered investment strategy important and 46 percent considered the emerging managers’ track records an important factor in evaluation.

Nearly 64 percent of LPs were open to making an anchor commitment to an emerging manager, but with special terms. More than 81 percent of the LPs wanted discounted fees, 70 percent wanted discounted carried interest and 63 percent wanted co-investment rights.

Growth equity was the most popular alternative asset, and almost 74 percent of LPs had invested in it; 72 percent invested in buyouts and 53 percent invested in venture capital, the survey found.

Action Item: Download the Emerging Manager report here: