Emerging Fund Managers: Driving Returns with Innovation - Insights from Limited Partners

• Limited Partners prefer short-dated fund structures
• Intertrust launches guide for emerging fund managers, looking to set up a private capital fund

Limited Partners (LPs) are investing more and more in first-time funds because they are more entrepreneurial, better placed to deliver specialist strategies and more likely to produce higher returns than more established firms. This is according to a new study commissioned by Intertrust, a global leader in providing expert administrative services to clients operating and investing in the international business environment.

Almost half (46%) of LPs say they are drawn to new managers because they are nimbler and more opportunistic while over a third (36%) say they are better able to produce more focused strategies where competition from other funds is relatively weak.  For example, 47% of investors believe that emerging fund managers are better than established General Partners (GPs) at leveraging emerging sectors such as FinTech and blockchain.

An emerging fund manager’s ability to produce superior returns, cited by 34% of LPs, is borne out by industry data. According to Preqin, first-time funds have higher median net IRRs than other funds across 10 of the 15 vintage years since 2000, surpassing the net IRRs of all other funds by at least four percentage points for 2010-2012 and 2014 vintage funds.

Despite many GPs offering fee discounts to investors willing to commit to a first close, only one in five (19%) investors cited lower management fees as a reason to choose first-time funds.

In terms of fund structures, short-dated funds with term limits of between three to five years emerged as the most popular among LPs (30%), ahead of traditional closed end funds (25%), permanent funds (19%) and long-life funds with terms of between 15 and 20 years.

According to the research, the biggest challenges faced by investors considering committing capital to a first-time fund are the lack of track record (80%), untested fund teams (56%) and the greater resource required to conduct due diligence and monitoring (38%).

Intertrust’s study comes at a time when interest in emerging fund managers continues to grow, securing USD26billion in capital commitments across 226 funds in 2017 and accounting for a quarter of all private equity funds closed in 2017, according to industry data.

Michael Johnson, Director Fund Services, at Intertrust said:

“Emerging fund managers are occupying an increasingly significant position in the funds industry with investors being more willing to take a bet on an untried partnership.   While the ability to generate strong returns is crucial, those new managers that make a virtue of being small, nimble and uniquely qualified to pursue a specialist strategy that the larger funds have overlooked are likely to stand the best chance of successfully raising capital.

“The process of launching a fund can be challenging for emerging fund managers. This guide is a direct response to growing market interest and the many conversations that we have with managers starting out for the first time or spinning out from an existing fund. We’ve drawn on our years of success in helping managers launch their first fund and around a third of the managers we’ve helped have gone on to launch larger, subsequent funds”