As seen in the South Florida Business Journal

Emerging managers in today's financial climate face a multifaceted landscape where securing funding and achieving operational success require the adoption of innovative approaches. Managers must be adept at identifying and tapping into more diverse funding avenues, from traditional investment vehicles to alternative sources.

Citrin Cooperman's recent report, The Path Ahead for Emerging Managers in Private Equity and Venture Capital, offers valuable insights into challenges and opportunities emerging managers currently face. The report offers a comprehensive overview of strategies and recommendations for capital raising; critical aspects, such as fees and terms; significant themes around environmental, social, and governance (ESG) issues; and cybersecurity concerns; and provides an overall industry outlook.

Focusing on foundational principals

Given current market dynamics, capital raising necessitates an emphasis on the foundational principles of the funding process. For example, the importance of differentiation for a firm is a key positioning consideration that can ultimately lead to more successful outcomes. Emerging managers should highlight what distinguishes their fund from others by using a more conversational approach to better engage investors. Nurturing investor relationships long before the fundraising process begins is equally important. This approach allows for the establishment of mutually beneficial negotiation terms with investors and ensures they are well informed about goals, benchmarks, and timeframes. Dedicating time to explain fund terms, market movements, and the rationale behind any unique requirements lays the groundwork for better clarity and transparency.

Challenges impacting emerging managers

Raising capital is inherently challenging, and present market conditions exacerbate these difficulties. Costs associated with operating a fund have surged due to heightened demands in compliance, information technology (IT), cybersecurity, legal matters, and fund administration. These rising expenses add pressure on emerging managers who are already navigating a complex business environment. One way of addressing these concerns is through partnerships that possess complementary skills. Partners can enhance fund management, investment strategies, investor relations, and operational management. It is essential to select the right partners and establish a suitable working structure that defines roles, responsibilities, and contributions.

Our report found that only a third of emerging managers who apply to emerging manager programs succeed in obtaining allocations. This statistic underscores the intense competition and stringent selection criteria these programs employ. For newer managers, the lack of time and resources makes it particularly difficult to withstand the rigorous and often lengthy due diligence process required to secure funding. This situation highlights the need for emerging managers to find new ways to optimize fund operations and present compelling value propositions to potential investors.

4 strategies emerging managers can leverage

As emerging managers traverse a difficult terrain in the post-pandemic era, they are employing several nuanced approaches to adapt and thrive:

1. Co-investment opportunities: By offering co-investment opportunities, managers can attract investors who are looking for more control and direct involvement in their investments. This approach can also help build stronger relationships with investors by aligning interests.
2. Financing solutions (bridge funds and warehousing strategies): These solutions provide flexibility and liquidity, making it easier for managers to seize investment opportunities without waiting for traditional fundraising cycles. Bridge funds can offer short-term financing, while warehousing strategies allow managers to accumulate assets before transferring them to a permanent investment vehicle.
3. Niche investment strategy: Focusing on a specialized sector or investment theme can help managers differentiate themselves from competitors. A niche strategy can attract investors looking for exposure to specific areas that they believe have high growth potential or are underrepresented in their existing portfolios.
4. Operational infrastructure: Demonstrating a robust and efficient operational infrastructure can instill confidence in investors. This includes strong governance practices, advanced technology systems, comprehensive risk management protocols, and a capable team. A formidable operational infrastructure ensures the firm can manage investments effectively and handle growth sustainably. Emerging managers should actively seek the appropriate support and advice from trusted service providers, including fund formation attorneys, accountants, placement agents, and fund administrators. These advisors should have a wide breadth of knowledge in servicing peers in similar sectors and investment strategies. They can provide important guidance on complex regulatory compliance matters at critical growth junctures.

The path forward for emerging managers in private equity and venture capital

The outlook for emerging managers in private equity and venture capital remains fraught with challenges. Citrin Cooperman’s Financial Services Industry Practice understands current trends and helps emerging managers adapt with novel strategies to meet the demands of a competitive market and better themselves to attract and retain capital, overcome these hurdles, and generate alpha.

To learn more, contact Christopher Brown at cabrown@citrincooperman.com.