The Rising Tide: Investing In Emerging Fund Managers

By: Casper Sauerbier-Couvée

Accessing the best-in-class emerging managers is challenging and conducting due diligence on emerging managers is a craft that requires time and refinement

In the dynamic world of venture capital, emerging fund managers are often seen as the vanguard of innovation and potential high returns. However, they also represent a territory marked by uncertainty and risk. This article delves into why investing in these rising stars could be a strategic move, and how to approach it wisely.

The Appeal of Emerging Fund Managers

Emerging fund managers, often at their first or second fund, bring fresh perspectives and an unbridled enthusiasm to the VC landscape. They are typically more hands-on, hungry for success, and willing to explore uncharted territories or unconventional startups. This agility and willingness to innovate can lead to outsized returns, especially when they tap into nascent industries or technologies ahead of the curve.

Diversification of Investment Portfolio

Investing in emerging managers can add valuable diversification to an investment portfolio. These managers often target early-stage companies, which, while risky, offer the potential for significant growth. Their portfolios often include niches overlooked by established VCs, providing investors with a broader exposure to the startup ecosystem.

The Risk-Reward Equation

The potential for high returns is a significant draw. Emerging managers have historically shown the ability to generate top-quartile returns. However, the risk is equally prominent. Limited track records make it challenging to gauge their ability accurately. Investors must balance the promise of high returns against the inherent risks of backing less proven managers.

Strategies for Investing in Emerging Managers

• Due Diligence: Comprehensive due diligence is crucial. Assess the manager’s experience, track record (if any), investment thesis, and operational capabilities.
• Alignment of Interests: Look for managers whose interests align with their investors, often demonstrated through substantial personal capital investment in their funds.
• Portfolio Construction: Consider how the emerging manager fits into your overall investment portfolio. They should complement, not duplicate, your existing exposures.
• Relationship Building: Investing in an emerging manager often means building a long-term relationship. Open lines of communication and transparency are key.

Conclusion

Investing in emerging fund managers requires a blend of due diligence, strategic portfolio construction, and sometimes, an appetite for nurturing new talent. While it comes with a distinct set of risks, the potential rewards make it an exciting proposition. For those looking to diversify their portfolios and invest in the future of innovation, emerging VC fund managers present a compelling opportunity.