Key takeaways

• Recent slowdown in private equity fundraising has proved particularly challenging for emerging managers.
• Investing with emerging managers may provide mature PE portfolios with diversification benefits and potential alpha — although returns dispersion is typically wider in the emerging manager category.
• Deal-by-deal track records, experienced teams and strong alignment with limited partners (LPs) can help to mitigate perceived emerging manager risk.  

Emerging private equity is a broadly defined concept, but generally fund managers from this category will have only raised two or three institutional funds in a series, usually below the $2 billion threshold.

The past 18 months have seen a cohort of these managers pushing ahead with ambitions to raise new funds.

Truelink Capital, a Los Angeles-based mid-market firm founded by a team of former Platinum Equity dealmakers, continued work on its debut fund, which is targeting between $500 million and $700 million.¹ 

TruArc Partners, a mid-market firm that launched in 2021, secured most of the $1 billion sought for its first fund, according to Buyouts.² 

Meanwhile, consumer brands specialist Forward Consumer Partners closed its debt fund early in 2024 on a hard cap of $425 million.³

A tough road 

Despite these success stories, however, there is no doubt that the recent slowdown in private equity fundraising has proved particularly challenging for emerging managers.

Global fundraising dropped 11.5% to $804 billion — the lowest annual total since 2017. The number of fund closes slipped to 1,936, the fewest since 2015, according to Preqin figures.⁴

As fundraising activity has contracted, the market has become more concentrated. Fewer large funds have absorbed a bigger portion of available investor private equity allocations. In 2023, the ten largest fundraises accounted for more than a quarter of total capital raised, according to Preqin. In 2022, in contrast, this share was only 18% percent of total takings.⁵

With a greater slice of fundraising flowing to established managers, it has become more difficult for emerging managers. Pitchbook figures had emerging managers on track to raise less capital in 2023 than in any other year for the last decade.⁶    

In addition, a third of limited partners (LPs) were less-likely to invest in first-time managers during the next 12 months — up from 26% in 2022. The proportion of LPs either more likely or as likely to invest in debut funds dropped from 46 percent to 36 percent, according to Private Equity International’s study.⁷

Against a backdrop of macro-economic uncertainty and heightened sensitivity to downside risk, investors have pivoted towards existing relationships with established managers with scale and longer track records who are seen as a safe pair of hands.⁸

In addition, LPs are also seeking to consolidate the number of general partner (GP) relationships as a way to potentially reduce risk and keep portfolios efficient.⁹

But for all the challenges that emerging managers faced during the last 12 months, and the perception that new managers come with higher risk than established names, emerging franchises remain an important pillar of the private equity ecosystem. They offer investors the potential for outperforming returns, portfolio diversification and exposure to specialised, innovative investment strategies.

Potential performance edge

There is evidence indicating that the best crop of emerging managers may deliver outperformance.

In a study of Preqin data, Swiss-based private markets investment platform Unigestion analysed the performance of 731 debut buyout funds of vintage years between 2000 and 2020 and compared this performance to 3,300 funds of series two or later over the same period. 

The study found that the median net IRRs of first-time funds broadly tracked the wider market, but showed significant outperformance in the aftermath of the dotcom bubble and the 2008 credit crunch.¹⁰

There is also evidence to suggest that emerging managers are in a good position to deliver market beating performance or Alpha. According to analysis from Makena Capital Management, an alternatives investment manager, smaller firms are better placed to identify and exploit market inefficiencies than larger franchises.¹¹

Indeed, an LP survey by SS&C Technologies and Private Equity Wire found that 88% of LPs seek higher alpha from investments with emerging managers.¹²

A number of factors contribute to emerging manager performance, especially in the periods following market dislocation. 

The stakes for emerging managers are high and alignment of interest with investors is essential for securing sustainable investor backing and longevity. Unigestion notes that emerging managers usually have higher GP commitments than industry averages. Emerging managers are also less likely to have resources pulled away to deal with legacy portfolios and can focus fully on deal origination and execution.¹³

Emerging managers will usually have smaller funds and target smaller deals, providing more scope to source proprietary and bilateral deals, invest at lower entry multiples than in larger deals and gain exposure to the upside of professionalising portfolio companies at key stages in their development.¹⁴

Diversification with niche strategies 

From an investor perspective — in addition to potential returns upside — emerging managers present opportunities to diversify into new geographic locations, where private equity is still maturing.¹⁵ They can also offer a diverse range of specialised deal strategies for LPs to select, opening up opportunities to enhance core portfolios with niche strategies where investors see exciting growth potential.¹⁶

Finally, an emerging manager program gives first-time investors the opportunity to grow alongside fund managers. This can be an attractive feature given that big firms typically already have an established investor base. By backing emerging managers, LPs can put themselves in prime position to gain maximum allocations to the future funds of emerging managers that may go on to become top performers.¹⁷

Choosing the winners

Picking out successful emerging managers is far more difficult than finding winners among proven managers with track records.

Emerging managers have yet to build the track records of maturer firms. Returns dispersion between top quartile and bottom quartile emerging managers, especially in venture capital space, is wider than for established peers, according to Hamilton Lane.¹⁸

Working with a partner or platform that is experienced in selecting emerging manager talent, however, can help to mitigate some risk. 

Due diligence has to be closer and more detailed and the value of investing time in building a relationship with an emerging manager prior to fund launch should not be underestimated.

It is also worth noting that many emerging managers will be fronted by experienced deal professionals who have built up long careers in blue chip firms. 

Core Equity Holdings, founded by a team of rainmaker dealmakers from Bain Capital¹⁹, and Castik Capital, launched by a veteran Apax Partners dealmaker²⁰, are examples of managers that may be “emerging” but still bring vast expertise and individual track records to the table. 

Emerging managers will also demonstrate capabilities by doing clusters of transactions on a deal-by-deal or co-investment basis to build a track record and demonstrate proof of concept before raising institutional capital.²¹

Emerging manager selection does present complexities, but there are ways to differentiate new entrants from each other, scrutinise capabilities and mitigate risk.

A valuable portfolio contribution 

Even though current macroeconomic uncertainty has seen investors focus private equity strategies on established private equity franchises, emerging managers continue to provide a valuable source of diversification and potential alpha.

Selecting emerging managers is a complex exercise and fundraising conditions have been tough for new firms, but the unique characteristics of the emerging manager segment mean that it is still well-positioned to make a valuable contribution to mature private markets portfolios. 

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