When it comes to a successful emerging manager program, it is important to focus sometimes on what does not work, three institutional investors said at the Real Estate Emerging Managers Summit in Austin last week.
The programs, set up by investors to spur investment in fund managers that are new to raising institutional capital, require a few key considerations to be successful.
“One of the key things we learned is to have engagement with the underlying manager, not just the partner you’re working with.”
“One of the key things we learned is to have engagement with the underlying manager, not just the partner you’re working with,” said one investor. “It’s about being as close to the manager as possible.”
Support from the senior levels of the organization was also critical, added a second investor. “If not, it is doomed for failure, because it does not have the appropriate level of structure and resources to devote to it,” he said. Identifying someone to take charge of the program also was paramount, the speaker noted: “If you don’t hire someone to take ownership of it, if it’s just an also-run item, if it’s placed under people who do mainstream commitments, it won’t get the proper level of attention.”
Additionally, the program needs to be able to withstand transitions at the top, said a third investor. “It needs to be sustainable beyond the leadership of the organization changing… If it’s so isolated and carved out from a reporting perspective, it’s easy for new leadership to come in and say, ‘Fees are too high, let’s just get rid of it.’”
Funding is another issue, as one investor pointed out the growing disparity between the size of emerging manager programs and the pension plans that oversee them. “You’re typically looking at the exact same size for the emerging manager program as you were 20 years ago. Meanwhile, pension funds have grown well beyond where they were 20 years ago, so there’s a gap in the relative size between the pension and emerging manager program,” the speaker said.
Then there is the question of how success is measured. The same investor noted that there have not been a lot of firms that actually have graduated from emerging manager programs and become traditional managers with the investor. However, another investor said that graduation was not necessarily a measure of success.
“In terms of graduation, it’s more organic in terms of the portfolio construction of the asset class that we’re in,” the investor said. In some cases, the emerging manager may not be a good fit for the portfolio at the given time and may actually make more sense as a traditional manager in another investor’s portfolio.
The speaker added: “Talking to other investors and being good advocate, that’s a better way than formal graduation.”
The panelists at “Emerging Manager Programs – How Have They Evolved?” included Thomas Henley at the UAW Retiree Medical Benefits Trust, Sharmila Kassam at the Employees Retirement System of Texas and Bryan Lewis at the Pennsylvania State Employees’ Retirement System.