Unigestion launches second emerging-manager fund

Emerging Managers Choice Fund II expects to hold a first close in Q4 2021.

Arendt & Medernach is providing legal advice on the fundraise.

Unigestion's first emerging-manager fund is a 2018-vintage vehicle with EUR 136.3m in capital commitments. The fund held a first close in November 2018 and a final close in July 2020. As of the end of 2020, the fund had committed 87% of its capital.

Coming out of the last 12-18 months, there is a pent up supply of emerging managers who found it difficult to fundraise in the depths of the pandemic" – Paul Newsome, Unigestion

Paul Newsome, head of investment solutions in private equity at Unigestion, told Unquote that the second emerging managers fund is a natural progression of a long-standing strategy: "The first emerging-managers fund was a limited offering where we went to a handful of our close existing investors. But we have been backing emerging managers for 25 years, it has always been part of our overall primary programme." The GP said in a statement that 40% of its commitments since 1996 have been for first- or second-time funds.

Given the uncertainty brought about by the coronavirus pandemic 18 months ago, many emerging managers have experienced a challenging period for fundraising. "Coming out of the last 12-18 months, there is a pent up supply of emerging managers who found it difficult to fundraise in the depths of the pandemic," says Newsome, adding that this has left many untapped opportunities for Unigestion's strategy. "It was really the established managers who found it easiest to fundraise then, as investors were mainly focusing on re-ups – it's a different story for emerging managers. So the opportunity is now quite large. We can take cornerstone positions, lead the discussions on terms and conditions, and benefit from that."

In spite of the difficulties, Unigestion's network-building has not suffered during the pandemic, Newsome told Unquote. "The network has been growing in the past year and we typically see 150-250 new opportunities every year. Emerging managers are very adept at using virtual solutions for new relationships." The GP's existing network has been key to this, he added. "We obviously have a backbone network with established GPs, so we see spin-offs quite early. These conversations have been continuing irrespective of the pandemic."

Unigestion manages the risk of investing in emerging managers carefully, Newsome told Unquote. "We won't be the cornerstone investor if we think there is a risk that these managers do get to a critical size. But often it's quite clear which ones will get the necessary momentum and which ones won't. We can also help with their fundraising through our own relationships, since we have investors who want to invest alongside us."

The composition of a team is also a key part of Unigestion's assessment of potential managers for the programme. Newsome told Unquote: "Compared with established managers, there is a lot more focus on the team construction, as well as team alignment incentives. There is a risk if the team is not set up in the right way; one person might have too much influence, or it can even be too much of a democracy. We look for balance and we have a lot of experience, so we have seen what works and what doesn't work."

We focus on sectors that play to our investment themes, which we believe are more robust and have more long-term growth potential" – Paul Newsome, Unigestion

Newsome also noted that portfolio construction is a risk that Unigestion works to mitigate when assessing opportunities, noting that meeting managers can require more guidance on portfolio-building and keeping reserves.

"Sector risk is also something to take into account," Newsome told Unquote. "Many emerging managers are more niche, so you have to take a macro view on the sectors in which they invest. We mitigate this by being very specific: we focus on sectors that play to our investment themes, which we believe are more robust and have more long-term growth potential."

"There is more dispersion in returns for emerging managers, and these factors explain a lot of the dispersion of returns," Newsome said. "But assessing these risks is how we make sure we back managers in the top or second quartile."

Investors
Unigestion expects its LP base to be similar to those of its other strategies, comprising institutional investors such as pension funds, insurance companies and financial institutions from the US, Asia-Pacific, and Europe, including the UK, France, Germany and the Nordic region.

Newsome told Unquote that its funds, including its emerging-managers programme, are generally appealing to LPs who are aiming to build up their own networks. "Typically we have investors who don't only want the potential alpha that you can get from investing in emerging managers, but they want to use it as a way to broaden their relationship bases. Many already have their pool of established managers in which they invest, and the difficulty for them is getting access to the emerging stars. So they see the fund as a seeding programme."

The fund aims to generate net IRR of more than 15% for its LPs.

Investments
The fund will make an equal number of investments in Europe and the US, with opportunistic exposure to other regions, according to a statement. The vehicle backs spin-offs from hard-to-access GPs, as well as industry experts with specialised strategies.

Unigestion's first Emerging Managers Fund backed managers including Sheridan Capital Partners, as well as Columna Capital, SF Equity, Greenpeak Partners via Greenpeak II, and Cow Corner, a spin-off from Hg.

The fund will make 12-15 fund investments, as well as 10-15 direct investments. It will deploy EUR 10m-25m for fund investments, with additional co-investment capital available for larger tickets. The fund can deploy EUR 3m-7m for co-investments.

For fund investments, the vehicle will typically back buyout and growth funds with fund volumes in the EUR 150m-300m, although it can commit to vehicles as large as EUR 500m.

Exclusion criteria for investments are based on the UN Principles for Responsible Investments, as well as on an ESG assessment. "ESG has become much more of a focus: GPs now realise it is a critical point for investors," Newsome told Unquote. "Emerging managers want to start with a clean slate and with a proper ESG system in place."

Emerging managers also bring other themes to the market from the ground up, said Newsome. "In the US especially, many emerging managers are GPs led by people from minority backgrounds. In Europe, we are also seeing women-only GPs and we are talking to a couple in the UK. Industry digitalisation is also a theme, and we are seeing some specialist firms focused specifically on this."

People
Unigestion – Paul Newsome (head of investment solutions, private equity); Christophe de Dardel (head of private equity).

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