Emerging managers:

Harriet Matthews
04 November 2022

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Unigestion's Kim Pochon told attendees at Unigestionтs Emerging Manager Conference 2022 that the challenging macroeconomic environment makes now the right time for LPs to commit to emerging managers, given their typical outperformance and strategy specialisation.

Pochon is a vice president at Unigestion and co-heads the firm's Emerging Managers programme.

The challenging fundraising environment has been brought about by factors including uncertainty, LPs grappling with the denominator effect, and a number of "megacap" fundraises taking a significant chunk of capital, Pochon noted. In spite of the doom and gloom, this environment can bring advantaged for LPs and GPs alike when it comes to emerging strategies.

The conference saw Unigestion present data on the size and fundraise duration of first-time funds versus those of established managers. The more significant change in recent years is the time taken for funds to reach a final close. While first-time funds have typically taken longer to raise than their established counterparts, with the former typically taking 16 months to more than two years, this gap has closed in 2022. While it can take longer for LPs to invest in emerging managers, the current market affords them this extra time, since almost all fundraising processes are now taking longer on average, Pochon argued.

Although some outstanding USD 1bn-plus first-time fundraises have been completed in the past year, particularly in the US, the average fund size for emerging managers has remained "modest", Pochon noted. Managers targeting larger deals often use co-investments to reach their desired equity ticket, keeping the overall size of their funds relatively low, he said.

Going the extra mile
Many emerging managers will continue to raise capital deal by deal to build their track record, Pochon said. For those looking to raise an institutional fund, differentiation will be a crucial factor, he added. This involves not only having a specialised strategy or sector focus, but also offering shorter duration or more concentrated funds to differentiate themselves from their peers, Pochon said.

US-based Unigestion private equity vice president Lisseth Lin noted that the inherent alignment between emerging managers and their LPs is also a bonus in a challenging environment. "Established megafunds have become asset gatherers, and they make their fees based on AUM," she noted. "They can be less hungry and incentivised, whereas emerging managers need to work for carry as this makes up the bulk of their earnings." This leads to discipline in underwriting deals, with pressure to "get it right the first time" but less pressure to deploy from copious amounts of dry powder, she noted.

Emerging managers can also go beyond the typical LP-GP relationship. Incentives for LPs can include offering "earlybird management fees", Pochon said. Lin added that the firm can even agree to standard fees for the first fund before negotiating these lower for a subsequent fundraise, given the important role played by this fee stream in getting a new GP off the ground.

Specialised strategies
Part of why first-time funds tend to perform better during times of crisis can be attributed to resources, Pochon said. "They tend to have no or very little legacy portfolio, so they don't have to fix a lot of issues in companies that they have owned for a couple of years, fighting with equity cures or convenant breaches," he said. "They are focused on scouting and defining the best deals."

Another frequently cited reasons behind the outperformance of emerging managers is their sector or strategy specialisation. Emerging manager teams are generally made up of industry experts who have either come together from different backgrounds or spun out from the same firm, with the intention of implementing a specialised strategy that should give them a competitive advantage in any deals that they pursue.

The trend of first-time funds launching with a dedicated impact strategy is set to continue, Pochon said. Pochon added he would estimate that around a third of the emerging managers that it sees in Europe are technology-focused, with healthcare and business services also remaining prominent due to their large share in the European economy. Lin noted that the majority of first-time funds that the firm sees in the US are technology-focused, although it remains to be seen whether this sector will continue to outperform in the tougher macroeconomic environment.

While CEE-focused funds are part of the scope of strategies that Unigestion looks at for its emerging manager programme, Pochon acknowledged that investing in such strategies is "not easy" in the current environment.

Overall, there is still strong LP appetite for emerging managers. Although the number of LPs who will not invest in first-time funds has increased steadily from 35% in 2011 to 47% in 2022, the number of LPs who will invest first time funds has remained fairly stable, at 33% in 2011 versus 30% in 2022, according to Prequin data

Names to watch
In addition to discussion of data and market trends between the Unigestion team, the conference saw presentations from a series of emerging managers from Europe, the US and Asia.

These included Netherlands-headquartered Convent Capital, which announced the first close for its debut agri food fund in April 2022, as reported. The founders of UK B2B software-as-a service-focused Axion Equity (namely ex-Inflexion technology investor Edward Fraser and operational expert Jonathan Organ) also presented their lower mid-market strategy and value creation toolkit.

BD-Capital was also among the emerging names showcased at the event, with managing partner Andy Dawson debating the merits of being an emerging manager in the current macro climate with Pollen Street Capital's Lindsay McMurray, moderated by Paul Newsome, partner and head of portfolio management (private equity). BD-Capital invests in growing healthcare, services and consumer businesses, having launched its debut fund in 2019, as reported.

Switzerland-headquartered asset manager Unigestion manages a global Emerging Managers Choice strategy that sees it make commitments to GPs raising their debut or inaugural fund, as well as direct investments alongside emerging managers. It has made commitments in the past to early funds from managers including Tenzing, Avallon and Northedge, according to Unquote Data.

The firm's second Emerging Managers Choice Fund has a EUR 200m target and is currently on the road, according to Unquote Data. Unigestion's Newsome told Unquote earlier this month that the firm is expecting to announce subsequent closes for the vehicle.