Messaging, honesty and patience key for emerging managers seeking foundational capital, panelists say

Emerging investment firms say they face common challenges in their pursuit of foundational capital.

That’s especially true when it comes to differentiating themselves from their peers, managers and capital providers discussed at the 20th annual Texas TRS/ERS Virtual Emerging Manager Conference on Feb. 11.

Part of Emerging Managers Week, the conference was held jointly by the $211.6 billion Teacher Retirement System of Texas and the $40.3 billion Employees Retirement System of Texas, both based in Austin.

Storytelling and evidence

When she founded and launched Chepstow Lane Capital in October 2022, Chief Investment Officer Agata Dornan was told unequivocally by other hedge funds, prime brokers and other people that “fundraising was very challenging.”

On top of that, as an emerging manager focused on credit opportunities in Europe, she was entering her first fundraising environment at a time when, “because so much of the capital sits in the U.S., a lot of people weren’t enthusiastic about Europe — which, candidly, is part of the reason that the opportunity was so compelling.”

But the most powerful tool Dornan said helped Chepstow in “getting that first ticket” has been storytelling. For the manager, this entailed articulating what its strategy entails and how it’s different from others, and “maybe over-communicating along the way.” After all, “ultimately, this is all about building relationships,” she added.

Another key for Chepstow has been providing performance data and backtesting to make executives at allocators comfortable investing in her firm. Chepstow has less than $1 billion in assets under management, according to its Form ADV filed in May.

“Getting that first bit of substantial capital that’s ex-friends and family — from a very big institution — is hugely meaningful for any emerging manager, and really just changes that conversation once you get someone to go first,” Dornan noted.

On the capital provider’s side, it’s important for emerging managers to be upfront in their first meetings, said Michael Crook, CIO of the Philadelphia-based private wealth manager Mill Creek Capital Advisors. He noted that “there’s always going to be instances where there’s a mismatch from an investment philosophy standpoint or normal due diligence considerations,” and the red flags tend to show up later on.

Regarding these red flags, “if we had been aware of (it), we possibly would’ve been able to get comfortable with it,” Crook added. “But the aspect of assuming that we’re not going to be able to cover that information through references or background checks, that usually results in us stopping the process because it’s not a good way to start a relationship.”

For Stable Asset Management CEO Erik Serrano Berntsen, one of the best pieces of advice he’s received is to add to the pitch deck what wrong moves or mistakes have been made at the firm or “what you’re not good at.”

“That puts the elephant in the room on the table, and you can actually address it,” he added. About 10% of pitches proactively do that, but “it’s a real differentiator, and actually allows you to make progress.”

A New York-headquartered private equity manager, Stable has $5 billion in AUM, and $20 billion in AUM through partnerships, including with emerging managers.

Limited but specialized staff

As they start out with limited resources, emerging managers work with a small staff.

Chepstow recently added two analysts to its now four-member research team, and by doing so, Dornan said it “completely reinvested all the capital we got at the start of the year back into the business.” Growing the team’s resources still marks a milestone for the firm.

To show the business’ efforts to de-risk, “it has been hugely important to us to ‘rep’ to allocators that we were break even at launch, and we’re break even today,” Dornan added.

At Godspeed Capital, the growth of the team over the years is “in lockstep” with the growth of the private equity firm’s capital, said managing partner Douglas Lake Jr. The $1.1 billion Washington-based manager now has nine investment professionals, including a chief financial officer who joined in the past six months and has been “hugely impactful'' in addressing the administrative burden on Lake’s desk.

Many staffers in the team come locally from the defense-government marketplace in Washington, and that “brings to the table a requisite-level experience,” said Lake, adding that it’s also a way of investing in the community and growing relationships within the firm’s target investments, which include lower-middle market defense and government services and technology companies.

Baby steps toward direct partnerships

Currently the senior director of Texas Teachers’ $5.9 billion emerging manager program, Kirk Sims said that he started talking with P. David Bramble 10 years ago, when Sims led the emerging manager program at the Teachers’ Retirement System of the State of Illinois, Springfield.

At the time, Bramble used an independent model for MCB Real Estate, where he is managing partner and co-founder. Now, the $3 billion Baltimore-headquartered manager’s model has adopted a partnership strategy in which it invests in other emerging real estate GPs.

“We still obviously invest for separate accounts with other pension funds and with other groups, but this particular vehicle, we think, is special because it’s a way to attract higher returns,” Bramble said in a panel discussion moderated by Sims.

Bramble added that it’s also a way to “provide entrees” to other emerging managers who aren’t ready to receive capital directly from a big institution. These prospective partners would be in the same position that Bramble was in when he first talked with Sims, who added a caveat that “it’s not personal when I tell other people that you’re not ready for our capital.”

These emerging managers “know how to execute, but they aren’t ready to handle pension capital directly, so we really think it’s a very nice bridge to create what hopefully are a whole phalanx of managers for your direct programs in the coming years,” Bramble added.