Emerging Fund Managers — Everyone Has to Start Somewhere
Whether you are part of a team of emerging fund managers like the ones at 1839 Ventures®. Or maybe you are launching your own business, or perhaps you are making an initial investment. Most of us have heard the phrase, “You have to start somewhere.” This statement is true for anything that any of us have ever set out to accomplish. There was a first time when you had the initial idea and a means to make it happen.
No matter who you are, and no matter what you are trying to accomplish, everything has its beginning. This is also true for general partners, fund managers, and managing members in venture capital firms. Many general partners, managing members, and principals come from backgrounds that may lend to their success. Even firms that have eventually grown into some of the largest venture firms, who now manage multiple billions of dollars of assets under management (AUM), in their start, each of them ultimately had their first day.
What Makes Emerging Fund Managers So Special?
In a recent question and answer session between Lauren Mathias, CFA, and VP, and Uven Tseng, CFA, and VP, Emerging Managers – Small Firms with Big Ideas, by Callan Associates via SlideShare. Tseng asks, “What are some of the main reasons to invest in emerging fund managers?” Mathias answered, “The short answer is performance.” She went on to say that over long periods, both historical data and research show that smaller fund managers tend to outperform their larger counterparts.
Later in that same session, Tseng asked, “When you look at emerging fund managers as a group, do they outperform established managers across the board?” Summarizing Mathias, it often depends on the asset class. No one number can point to emerging fund managers consistently outperforming established managers. She goes on to say, that smaller emerging fund managers tend to outperform their larger counterparts because of their nimbleness. Smaller firms tend to demonstrate more agility than larger firms with greater AUM.
Beyond being nimble, what makes emerging fund managers special is often their hunger, creativity, and willingness to explore alternatives that more seasoned fund managers may not. Emerging fund managers are often risking a more substantial portion of their capital which certainly leads them to be more vested in the fund’s success. Emergent managing members or fund managers also tend to identify and invest in what may be fresher or differing ideas and are more apt to potentially invest in unexplored markets than what their larger counterparts tend to overlook.
What Kind of Investor Tends to Seek Out Emerging Fund Managers?
In Small Firms with Big Ideas, Tseng asks, “What kind of investors typically seek out emerging fund managers?” Mathias responded, that historically institutional investors have been the primary investors considered emerging fund managers. These institutional investors included larger public pension funds and endowments. Both state and corporate pension funds, and sovereign wealth funds tend to be most active in their investments in first and second funds. It is not to say, however, that others like family offices and private clients don’t benefit from emerging fund managers. Mathias says, “Other types of investors are starting to take notice.” These early successes have led to other investors taking notice and becoming interested.
Many people follow alternative investments and venture capital as an asset class in particular. Several of them have written numerous articles covering emerging fund managers as a topic. In Thurman V. White, Jr’s article Successful Emerging Manager Strategies for the 21st Century Thurman is quoted as saying, “Many studies over time have shown that small, employee-owned investment companies outperform their larger competitors. It has almost become a truism in our industry that the greater the assets under management (AUM), the less the likelihood of outperformance. The inverse relationship between assets and alpha (assets up, alpha down) is part of the reason that many global investment firms position themselves as a group of small boutiques.”
Smaller and Newer May Perform Better, But Doesn’t the Past Matter?
In this post, we have already heard from a few individuals who based on their own research have demonstrated that smaller emerging fund managers, similar to the core venture team at 1839 Ventures®, may provide better-than-average fund returns.
Of course, there can be no claim made, or guarantee provided that any of the 1839 Venture Funds™ will outperform its peers. However, what we can say is that along with our dedication to the principles of our investment thesis, and our core venture team’s previous venture capital industry backgrounds and fund-raising experience, this may provide 1839 Ventures® with an extra edge and a tremendous opportunity for success.
Now is the Right Time to Invest
Kelvin Liu of Invesco, a Fund of Funds (FoF), has said regarding emerging fund managers, “Since they do not have historical challenges of poor performance, they can pursue unique investment strategies.” A willingness to pursue alternative investment strategies along with a venture team’s ability to cut through the noise of market hype, versus their ability to determine actual market reality, their holding of a strong knowledge base, or domain expertise, paired with team dynamics and cohesion can lead to a highly successful venture fund.
With all the talk of emerging fund managers leading to better performance, one might be asking themselves is now the right time to invest? Investors should note that even with all of the research that shows emerging fund managers leading to better fund performance, this does not mean that there is no investment risk. Alternative investments such as pooled investment vehicles, or venture capital funds as an asset class may not be suitable for every investor.
A Note About Risk and Success
According to United States Census data, only 48.8% of newly established businesses that were started between 1977 and 2000 were still operational by their fifth year. Neil Patel, a Forbes contributor has written a recent article claiming that up to 90% Of Startups Fail: What You Need To Know About The 10%.
Investment risk can be lessened somewhat by investors who engage in multi-manager, or who employ multiple fund strategies to both diversify and spread their investment risk. It may also be lessened by the selection of skillful fund managers like the venture team at 1839 Ventures®. Further thinking about the Forbes article, it can be argued that emerging fund managers tend to succeed when they possess both the skills and the knowledge to succeed. The truly successful ones are the ones who are actively engaged in the startup ecosystem and who are actively paying close attention to the remaining 10% of businesses, or the ones who thrive.
