Gen II: The emerging manager market is poised for growth

A re-emergence for emerging managers is under way, writes Gen II Fund Services principal Jeff Gendel.

This article is sponsored by Gen II Fund Services

As we finished last year’s emerging manager survey, the market for emerging managers ground to a virtual – and literal – halt. The pandemic meant pencils down for LPs as they performed triage on their existing commitments and attempted to assess the near- and long-term business impact from covid. Even the best-intentioned, most-dedicated LPs were delaying commitments to emerging managers, and many in the market couldn’t see any light at the end of the tunnel.

Fortunately, the ground stop for new commitments didn’t last too long. As we moved through the fourth quarter and into 2021, LPs figured out how to make commitments over Zoom, how to overcome the lack of a traditional in-person meeting and assessment of face-to-face team chemistry. GPs became better at telling their stories, and of course, the bounce back in valuations confirmed that most sectors of the economy would not be as adversely impacted by the pandemic as once thought.

As we look toward the balance of 2021 and into 2022, the emerging manager market is poised to eclipse its pre-pandemic levels of new firm creation. Indeed, at Gen II, we have seen more emerging manager opportunities this year than at any time since we began to track this segment, including a record number of first-time funds seeking more than $1 billion in capital.

Operations deep dive

What has been in sharper focus for our emerging manager prospects is the depth of due diligence they perform on fund administrators and service providers across the spectrum. Many of these due diligence questions reflect a far deeper understanding of the drivers of success from an operational perspective, and a broader set of imperatives from the GP and LP view. And as the 2021 Emerging Manager Survey shows, over 80 percent of respondents cited “proven expertise and experience with funds like mine” as an “extremely important” or “very important” factor in choosing service providers. By comparison, less than a third of respondents cited “a prior relationship with the provider” as a crucial factor in that decision.

“ Over 80 percent of respondents cited ‘proven expertise and experience with funds like mine’ as an ‘extremely important’ or ‘very important’ factor in choosing service providers”

GPs want a service partner with a long-term view, where the administrator’s investment back into their organization yields tangible results for their clients. Or, simply stated: can my fund administrator be my partner for the lifetime of our firm?The questions posed by emerging managers and their LPs across many disciplines of the sponsor/administrator relationship include: Can the administrator demonstrate scalable solutions as sponsors raise more capital? Are they regularly investing in technology to meet the enhanced reporting needs of investors and internal stakeholders? Have they instilled a corporate culture that ensures long-term stability across the service team and firm? Do they provide specifics on the team that services the engagement – is it a dedicated team, or will the sponsor need to call separate departments for separate tasks? What access to fund information can the sponsor have in an on-demand fashion? And how is the fund administrator ensuring data protection and defense against cyber threats?

Demonstrating the value proposition

At Gen II, we offer our value proposition to emerging managers through a keen understanding of these drivers, and through our unmatched experience and unparalleled track record. Working with more than 85 sponsors as they have embarked upon their first fund – more than any other administrator – the industry’s leading emerging managers and their investors rely on us to provide world-class service and performance.

Expert people lie at the core of any service relationship – Gen II’s team of more than 750 professionals is the most experienced team in private equity fund administration. Our investment in people through the Gen II Learning Academy ensures that we continue to develop world-class fund administration professionals to service our clients as they grow.

“ GPs want a service partner with a long-term view, where the administrator’s investment back into their organization yields tangible results for their clients ”

Next-generation technology plays an increasingly important role in the fund administration process for emerging managers. Today’s first-time fund sponsors strive to offer the same access to investment and performance information as they likely had in their predecessor firms. Whether that data request comes from the IR team, deal team or corner office, emerging managers need confidence that satisfying information requests is only a few clicks away. For our part, we have developed cutting-edge technology to enable IR teams and CFOs to break the traditional one fund to one investor reporting protocol and enhance the IR dialogue by providing bespoke performance information across fund entities, investment types and LP relationships. Investors are also seeking greater transparency on portfolio company activity. Gen II’s technology investments enable sponsors to access integrated portfolio company, ESG and performance reporting data that today’s investors seek.

Scalability, performance and experience truly matter

Given the increased complexity of fund structures, escalating stakeholder expectations and complex regulatory requirements, it is vital that emerging managers team up with a provider that can demonstrate relevant and specialized experience, a commitment to technology investment, team continuity and growth, and the ability to scale with clients. And, of course, seamless, proven performance in today’s hybrid work environment is crucial.

Gen II has helped launch more than 85 emerging managers. We have worked with them to build a strong foundation for success, with proven ability to help them scale as they add new funds, investments and investors. The private equity entrepreneurs we work with value the confidence our experience imparts, and they can trust their funds will be well run. Our clients know they can rely on us as a true partner able to offer independent and valuable guidance over and above the fund administration services we provide. Our partnership approach to business relationships is an essential differentiator that resonates for the emerging managers on Gen II’s platform.

For the end of 2021 and beyond, marketplace data reflects that the emerging manager market appears poised to continue its blazing path – with record investor interest, larger dedicated pools of investor capital for emerging managers, more family offices, and professional investors seeding first-time funds. A highly qualified set of professional service firms – fund administrators, auditors, compliance consultants and attorneys – with deep experience supporting first-time funds will continue to be a vital component of the emerging manager’s journey.