At Barings, contrary to popular belief, we believe that identifying high-quality opportunities in emerging and diverse private equity managers can deliver attractive risk-adjusted returns to investors.
ASSUMPTION vs REALITY
At Barings, we believe that identifying high-quality private equity managers early in their firm lifecycle can deliver attractive risk-adjusted returns.
As private markets mature, new firms continue to enter the private equity asset class. The fundraising landscape has grown increasingly competitive, with more general partners (GPs) in the market and more funds seeing record amounts of capital.1 Emerging managers (broadly defined as GPs raising institutional funds I, II or III) are facing challenges as limited partners (LPs) decrease the number of GP relationships and commit larger amounts to fewer funds. Emerging managers also face the need to differentiate themselves from their peers as the market continues to grow.
Notwithstanding the ever-present fundraising challenges, data shows emerging managers typically deliver better returns to investors, with first-time funds having delivered higher median net IRRs than non-first-time funds across 10 of the 15 vintage years since 2000 and one-third of first-time funds having achieved top-quartile performance (all vintage years combined).
Despite this, emerging managers are often avoided or overlooked by investors.
Challenging common assumptions
Almost half of all investors have chosen not to invest in first-time funds, many also avoiding Funds II or III, due to some common misconceptions around emerging managers, including the belief that all such managers are unproven investors with no track record, far too risky and vastly under-resourced.
ASSUMPTION: Larger funds are positioned to generate higher returns.
REALITY: As PE funds in general grow larger and more established, the likelihood of a “home run” or a “strikeout” that makes or breaks the overall performance of the fund decreases. Performance tends to gravitate toward the mean versus the upper or even the bottom quartile.
- 2017 saw 2,296 funds in the market raising $744 billion. Source: February 2018 Private Equity and Venture Capital Spotlight.