Emerging Managers: Not to be confused with inexperienced managers
Some investors want ‘Brand names’, whilst others are keen to be shown hidden gems, or the next big thing.
Something that is being talked about a lot at the moment is the prevalence, and performance, of emerging managers. Many investors we speak to want to know what we think of emerging managers, and if we’re planning to work with any. It’s an important, and ongoing, conversation on whether we want to offer these opportunities to our community.
What is an emerging manager?
First, it is important we define who we view as an emerging manager.
For example, where does the line between emerging and emerged sit? A fund considered emerging may be:
- Raising one of their first two funds;
- Raising one of their first three funds; or
- Raising one of their two or three funds (i or ii) but where the fund size is <£100m.
At Sprout, we view things differently.
It’s not about the size of the fund you raise: There are first-time fund managers who have raised £100m+ funds. That is still an emerging manager.
It is not solely about the fund number you’re raising: Although this is a better indicator of status than fund size, we have seen fund managers raise four funds within 5-7 years. This does not necessarily mean the fund has proven its thesis or provided returns (DPI) to its investors (LPs). This may just mean it has deployed capital quickly.
With so much nuance, we don’t look at managers as ‘emerging’ or ‘established’. Instead, we consider inexperienced vs experienced.
To us, a fund or fund manager moves from inexperienced to experienced once they have proven their thesis with strong returns to their investors. This experience may have been gained through the current fund they are working for, or a previous one.
Past performance does not guarantee future results… or does it?
Past performance does not, and can not, guarantee future results; however, in venture capital funds, it has proven to be a reliable indicator of the next fund performance.
Research by CB Insights shows there is little correlation between a manager’s experience and the performance of a fund. Technology moves fast, the expectations of what a fund offers to the best founders can change, and sometimes fund managers just get it wrong – they’re human, after all!
However, research by Darden Business School (summarised by Morgan Stanley) shows that in venture capital, if the manager’s previous fund has performed well (top quartile), there is a c.50/50 chance that the next fund will perform in a similar manner. This trend has persisted over a number of decades, and largely across quartiles. We dive into the reasons why this might be the case in this blog.
In summary, as long as a fund hits the strict criteria set out in our 10 Ts framework and passes the subsequent investment committee, Sprout will certainly consider making what might be considered as an emerging manager available to our community.
Following our 10 Ts framework, those emerging managers who do score more highly are likely to outperform in areas such as being subject matter experts, underrepresented managers, or those with the strongest ESG credentials.
However, it is less likely that Sprout will be offering inexperienced managers via the platform anytime soon. Explore our current fund partners on the Sprout Platform today.
— Capital at risk. T&Cs Apply. Nothing in this article constitutes investment advice. —