Investing in Emerging Fund Managers: Here’s Why You Should Consider It

You Have to Start Somewhere

“You have to start somewhere” is a common phrase that most of us have probably heard. This statement holds true for any goal that any of us has ever set for ourselves, especially if you are a member of a team of new emerging fund managers, such as Capital Q Venture. In whichever interests you, whether it’s to start a business, or perhaps you’re investing cash into it for the first time. There comes a time when you formulate the idea, and you have the method and means to get it implemented.

Regardless of who you are and what you are trying to achieve, everyone needs to start somewhere. This is a mere fact for all general partners and emerging fund managers, as well as primary managing members of venture firms. Success is likely to be due to the skills, experiences, and backgrounds of these various general partners, managing members, and principals who previously worked as founders and employees, for one reason or another. Firms that have been able to grow into large venture firms, who are now busy managing multiple billions of dollars of assets under management, had their own first day before they reached success.

Why are Emerging Fund Managers Unique?

During a series of interviews facilitated by Callan Associates via SlideShare, among Lauren Mathias, CFA & VP, along with Uven Tseng, CFA & VP, Emerging Managers – Small Firms with Big Ideas: “What are some of the main reasons to invest in emerging fund managers?” “The short response is performance,” Mathias replied. She goes on to mention that empirical statistics and analysis indicate that smaller fund managers tend to outperform their larger counterparts over longer timeframes.

Afterward, in that same series of interviews, Tseng asked, “When you look at emerging fund managers as a group, do they outperform established managers across the board?” Mathias believes that it frequently relies on the asset class. There is no one metric that can demonstrate that emerging fund managers continually outperform established managers. She continues to state that because of their agility and liveliness, smaller emerging fund managers are likely to outperform their larger counterparts. Smaller firms appear to be more agile than more prominent firms with higher AUM.

Emerging fund managers may be more eager, creative, and willing to try alternatives than others. Being agile is undoubtedly essential; it is their defining characteristic that distinguishes them from their peers. It is often known that emerging fund managers are more likely to put up a large portion of their own capital, which implies more substantial confidence in the fund’s success. Emerging fund managers are also more likely to consider and participate in what could be newer or different concepts. They are more likely to actively invest in untrodden markets that their broader counterparts tend to miss.

What Types of Investors are Attracted to Emerging Fund Managers?

Tseng wonders in Small Firms with Big Ideas, “What kind of investors typically seek out emerging fund managers?”  According to Mathias, traditionally, institutional investors were the key investors in emerging fund managers. Larger public pension trusts and endowments were among these institutional investors. State and corporate pension funds, as well as sovereign wealth funds, are the most involved in investing in first and second funds. It is not to claim that other groups, such as family offices and private clients, do not gain from emerging fund managers. “Some kinds of investors are beginning to take notice,” says Mathias. These early achievements of emerging fund managers have piqued the attention and interests of other investors.

Many people are interested in alternative investments, especially venture capital, as an asset class. Many of whom have published several articles on the subject of emerging fund managers. Thurman V. White, Jr. has cited in his article; Successful Emerging Manager Strategies for the Twenty-First Century, “Many studies over time have found that independent, employee-owned investment firms outperform their larger counterparts. In this industry, it has almost become a truism that the larger the AUM, the lower the probability of outperformance. The opposite relationship among assets and alpha (assets up, alpha down) is part of the reason that many global investment firms place themselves as a group of small boutiques.”

The General Agreement Claims That the Small and New May Do Better, But What About the Past? Does It Matter?

Based on their research, several individuals have shown that smaller emerging fund managers may produce higher than usual fund returns.

Naturally, no argument or promise can be made that any of those investment funds would surpass their peers. What we would claim is that, along with our commitment to the investment thesis’s principles and our team’s prior venture capital industry experiences, backgrounds, and fund-raising expertise, is that we give venture capital an extra advantage and a significant potential for growth.

When Is The Right Time To Invest?

“Since they do not have a history of bad performance, they are able to pursue unique investing strategies,” Kelvin Liu of Invesco, a Fund of Funds (FoF) manager, said about emerging fund managers. Such desire to explore alternative investment approaches as well as its capacity to smash through the clutter of market hype, against its ability to determine actual market truth, its possession of a deep set of knowledge or domain experience, and team dynamics and coordination, will result in a highly efficient venture fund.

After all the recent hype, is it finally the right time to invest in new fund managers? Even with all available analyses, these funds’ outstanding successes tends to outperform the market; however, this does not guarantee that investors may not experience investment risk.

About Risk and Success

US Census reports claim that only 48.8% percent of newly formed companies established between 1977 and 2000 were still operating by their fifth year. Neil Patel, a Forbes contributor, recently published an article saying that up to 90% of startups fail: What You Need To Know About The 10%.

An investor can reduce their risk by using more than one fund or holding several funds, which helps them achieve portfolio diversification and spread their risk. Also, one can minimize the risk by selecting high-performing fund managers, and a reasonable argument can be made that emerging fund managers excel by possessing both expertise and experience.  The genuinely successful businesses are the ones that stay close and updated to the startup ecosystem and are paying attention to the last 10% of all companies that are there, actively involved and thriving with them.

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