Emerging managers consistently outperform - especially in times of crisis.
All articles and statistics show emerging managers perform best. Emerging managers are hungry, driven, with grit and passion, want to do better, often follow a vision and a thesis, and constantly improve and adapt to the market to make it fit. They have to outperform; otherwise, there is no second or third fund - as simple as that.
We are seeing a catharsis, a healing of the market, and an adjustment of valuations in private and public markets. "The king is dead; long live the king!" We are ending a cycle and entering a new one, and I am excited about it. While we are in a global crisis, horsepower lies below the surface (e.g., we have the lowest unemployment rate in decades). As a positive person, I see a bright future once the downturn ends.
During this stagflation, we are witnessing a trend that accelerates - while companies in private and public markets become more efficient, Limited Partners are reevaluating their current portfolios and shifting their allocations. We see a "U-Curve," and with this, money from institutions, family offices, and High Net Worth Individuals is re-deployed in:
1) Professional FoF (Fund on Fund) who do the evaluation work, due diligence, and understanding of trends, we see them rising.
2) Shift to "Blue Chip" Venture Capital (e.g., Sequoia Capital, Verdane)
3) The atomization of VC in the early stage: Specialized Micro- and Nano funds and experienced Solo GPs
The mediocre are having a hard time fundraising. With that said, a "No first-time funds" investment rule handles not only legacy habits but also feels outdated, especially in a crisis. This time and these outstanding vintages ahead in the early stage are a fantastic time to reevaluate the portfolio strategy and adapt accordingly.
Talking about emerging managers, I like to share the following findings.
"We want our GPs focused on picking outliers, not creating them. Emerging managers can provide differentiated and diversified access to a pool of start-ups that more established brand names may not have access to." Jamie Rhode of Verdis Investment Management
"We look for managers whose investment strategy is tailored to their unique, durable competitive advantage, who have demonstrated that they add significant value to founders, and with whom founders and other investors love to work."Alex Edelson, Founder and General Partner at Slipstream
Emerging managers manage smaller pools of money and must invest before anyone else gets in.
Emerging Managers recognize new trends early; their existing funds do not bias them.
Emerging Managers are better networked – they have been start-up founders themselves and/or where the first line of contact in their previous position in a fund.