Emerging Fund Managers: Hard Truths and Strategic Pathways to Success

Starting a fund as an emerging manager is a challenging yet rewarding endeavor. Here are five hard truths every emerging manager should understand before taking the plunge:

1. Building a Track Record is Non-Negotiable

• The Truth: Investors, especially institutional ones, prioritize a proven track record over potential. Without prior successful investments or relevant experience, fundraising will be an uphill battle.

• The Reality: Even if you have a compelling thesis, demonstrating past performance—through personal investments, work at established firms, or SPVs (special purpose vehicles)—is essential.

2. Raising Capital Will Take Longer Than You Think

• The Truth: Fundraising is a full-time job that can take 12–18 months or longer, especially for first-time managers.

• The Reality: Investors are cautious with emerging managers and often want to see persistence, network validation, and a clear value proposition. Be prepared for multiple rejections and a slow pace of commitments.

3. Management Fees Won’t Cover Your Costs Early On

• The Truth: The standard 2% management fee on a small fund doesn’t generate enough revenue to cover operational costs, salaries, and growth.

• The Reality: Many emerging managers bootstrap their operations, using personal savings or side gigs to sustain themselves until the fund scales.

4. The First Close is the Hardest. And it's not going to be institutional investors. 

• The Truth: Most investors prefer to wait until others commit (the “first-mover hesitation”), making the first close particularly challenging.

• The Reality: Securing anchor investors, such as family offices or high-net-worth individuals, is crucial to gaining momentum and attracting follow-on commitments.

5. Differentiation is Crucial in a Crowded Market

• The Truth: The market is saturated with funds, and being “another VC” or “another private equity manager” isn’t enough.

• The Reality: To stand out, you need a clearly defined niche, an innovative strategy, or an ability to access deals others can’t. If your value proposition isn’t distinct and compelling, it’s unlikely to resonate with investors.

Family offices often anchor emerging manager funds, while institutional investors typically do not, for reasons tied to their different structures, objectives, and risk tolerances. Here's an analysis:

Why Family Offices Anchor Emerging Manager Funds

1. Flexibility and Independence

   • Family offices have more freedom in decision-making compared to institutions bound by rigid processes or investment committees.

   • They can take calculated risks on new managers if they believe in the potential for outsized returns.

2. Desire for High Returns

   • Emerging managers often pursue niche or innovative strategies with higher return potential.

   • Family offices, especially those willing to allocate to alternatives, seek to access these opportunities early.

3. Strategic Relationships

   • Many family offices value direct engagement with fund managers, fostering a relationship that may yield co-investment opportunities or strategic benefits.

   • Anchoring gives them influence over fund terms and potential access to better deal flow.

4. Openness to Smaller Funds

   • Family offices are comfortable committing to smaller funds, whereas institutional investors often have minimum fund size requirements to ensure sufficient allocation efficiency.

5. Impact and Legacy Goals

   • Family offices frequently prioritize non-financial goals, such as supporting diversity in asset management, ESG initiatives, or regional economic development, which many emerging managers focus on.

Why Institutional Investors Typically Don’t Anchor Emerging Funds

1. Preference for Established Managers

• Institutions, like pension funds or endowments, prioritize minimizing risk and require a proven track record to allocate capital.

1. Emerging managers lack the long history and substantial AUM (Assets Under Management) that institutions seek.

2. Higher Operational and Compliance Standards

• Institutions require robust infrastructure, regulatory compliance, and reporting capabilities, which emerging managers may not yet have.

2. Allocating to a new manager involves significant due diligence, making it less appealing unless the potential rewards are overwhelming.

3. Focus on Large Allocations

   • Institutional investors often make large allocations (e.g., $50M+). Investing in small funds limits their ability to deploy capital efficiently.

   • Anchoring a small or first-time fund would not align with their portfolio strategies.

4. Risk Aversion

   • Institutional investors typically have low risk tolerance for unproven strategies or managers.

   • Their fiduciary duty to stakeholders discourages them from investing in high-risk, early-stage managers.

5. Internal Bureaucracy and Timelines

   • Institutional decision-making is slower, involving multiple layers of approval, which doesn’t align with the timelines of emerging funds needing anchor commitments.

Conclusion

Family offices anchor emerging manager funds because they have the flexibility, risk tolerance, and desire for unique opportunities. They also value the personal relationships and strategic advantages that come from being early supporters.

Institutions, on the other hand, prioritize stability, scalability, and established performance, making them more inclined to invest in established managers with significant AUM and proven processes. For emerging managers, family offices are often the most realistic first step in securing anchor capital.