The term ‘emerging manager’ is nebulous, and interpretations of what it means differ depending on the LP. Firms are typically deemed to be on their first or second fund. They will typically be five years old or younger. There are also connotations around size and a degree of specialization. But beyond that, the parameters are wide.
At Neuberger Berman’s emerging manager platform, Northbound Equity Partners, the term spans everything from newer and smaller funds to diverse teams, as well as independent organizations and new strategies within larger houses, according to Patricia Miller Zollar, a managing director at the firm. How a new manager positions itself with LPs in a crowded space is therefore critical.
So, what is it that LPs are looking for? Sector specialization is flavor of the day and indeed, 71 percent of emerging managers canvassed in the fifth annual Buyouts Emerging Manager Survey, conducted in partnership with Gen II Fund Services LLC, described themselves as specialists, with 35 percent targeting a single sector.
“A lot of newer firms are sector orientated,” says Scott Reed, co-head of private equity in the US at Aberdeen Standard. “In particular, there has been no shortage of technology and healthcare funds in recent years.”
The degree of specialization is only increasing. Recent success stories include Arctos Sports Partners, a platform dedicated to the professional sports industry and sports franchise owners.
Funds with impact – and especially those with diversity, equity and inclusion angles – are also in high demand. “The events of the past year have caused diversity and inclusion to be at the forefront of a lot of investors’ minds,” Miller Zollar explains. “An increasing number of LPs are asking how they can support DE&I efforts through their investments – which is, in turn, driving increased interest in the emerging manager space.”
“LPs are looking to emerging managers to fulfil their mission- and impact-driven allocations,” adds John McCormick, partner at Monument Group. “In particular, the diversity and inclusion movement is giving minority-owned managers a lot of due attention, so long as they have the requisite investment capabilities, of course.”
Corlex Capital, for example, is a minority-owned PE firm that provides growth capital in the franchising industry.
Molly LeStage, managing principal and private markets consultant at Meketa Investment Group, agrees that a DE&I angle is helpful. “Key differentiators for emerging managers that are proving to be successful include ownership structure and, specifically, diverse ownership,” she says. “If a manager is focused on under-represented groups, is a sector specialist or is led by individuals with unique backgrounds, that also plays well.”
In a congested marketplace, what matters is that a new manager has something compelling to set it apart. That could mean proprietary access to micro or lower mid-market businesses, according to Rick Spencer, co-head of Barings’ funds and co-investments platform. Or it could be an exceptional operating partner network like that of Argand Partners, which has set out its stall as the go-to globalization partner for mid-market industrial companies.
“We see emerging managers stand out for their differentiated networks and niche investment strategies,” Miller Zollar says. “Emerging managers will often focus on less competitive and attractively priced transactions. The use of leverage may be conservative and there may be strong alignment of interest. We see emerging and diverse managers going where others are not.”