Don’t Judge a Fund by its Number: What LPs Often Overlook in Fund Selection
As many LPs opt to commit limited capital to fewer managers amid today’s uncertain economic climate, revisiting key considerations in manager selection and capital allocation may prove worthwhile.
The strength of the private markets continues to encourage new firms to enter the private equity asset class. With more general partners (GPs) in the market, the fundraising landscape has grown increasingly competitive. This is particularly true for emerging managers, which are broadly defined as GPs raising institutional funds I, II or III.
With many limited partners (LPs) committing fewer dollars, all GPs are facing tougher economic times. Emerging managers face challenges in competing with established managers and in differentiating themselves from a growing pack of competitors. Notwithstanding those challenges, however, data show that emerging managers have historically delivered better returns to investors, with nearly one-third of emerging managers having achieved top-quartile performance.1 Often avoided or overlooked by investors, we believe emerging managers merit reconsideration by LPs.
Challenging Common Investor Assumptions
Almost half of all investors choose not to invest in first-time funds and many also avoid funds II or III. Decisions to bypass those funds often are due to some widespread misconceptions about emerging managers, including the view that all such managers are unproven investors with no track record, far too risky, and vastly under-resourced.
1. Source: Pitchbook. As of March 1, 2023.
