When Limited Partners Should Consider Emerging Funds

Why limited partners consider emerging funds

For many in the limited partner universe, an emerging manager with no track record can present a risk. For others, first time managers with unique fund strategies represent compelling opportunities.

Institutional Investor Considerations

For the institutional investor and other well established asset allocators such as endowments, insurance companies, pension funds, and large fund of funds with dollars dedicated to the venture capital and private equity asset classes, established managers are favored over first timers.

Limited partners with very large holdings have the ability to make significant allocations to the very best managers in the venture capital/private capital space. Not surprisingly, investors tend to continue to participate in new vintages rolled out by proven managers that build a successful track record based on unique fund strategy, organization, team structure, strong relationships with general and limited partners, and of course performance. Reviewing metrics such as NAV, Total Value, Distributions to Paid-In Capital (DPI), and Total Value to Paid-In Capital (TVPI) over a number of fund vintages will give investors assurances. Fund vintages present an opportunity for meaningful value creation over a long period of time and justify the illiquidity premium.

When do Limited Partners Consider Emerging Funds?

If you’re a manager without an established track record, new funds tend to take longer to establish. Although the risks of going with an unproven manager are present, many well-established limited partners with large amounts of capital to dedicate to the asset class have emerging manager programs in place where these organizations will seek first time funds. Similarly, limited partners with smaller allocations to the asset class may not have access to top quartile managers and may be considering new managers as a way to achieve returns.

First time funds have interesting characteristics that many find compelling. They are made up of individuals who were major contributors to an existing fund that want to start their own fund, or successful entrepreneurs who have built, scaled, and exited businesses in a distinct and emerging market sector.

The Benefits of Investing in First Time Fund Managers

  • The potential to form strong GP-LP relationships early that are sustainable over the long term
  • Access to unique deal flow and strong domain experience
  • Access to diverse strategies (minority or women owned firms)
  • Unique fund types, geographic focus, and industry/sector focus

First time funds can present compelling opportunities for limited partners looking to add an additional mix of managers to their illiquid allocation.

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