Despite the ever increasing amount of evidence that smaller managers (Emerging Managers) across all asset classes generate excess alpha, small managers still experience significant barriers to market entry and growth.
Large allocators of assets in the institutional investment world are increasingly seeking the higher rates of return that Emerging Managers can provide, as Emerging Managers are seeking additional assets to manage.
Such allocators of assets and their advisors, consultants and gatekeepers, do not have efficient mechanisms or maybe even the talent and experience to weigh the business risk associated with selecting any given Emerging Manager. Emerging Managers generally do not have the organizational depth to address the traditional needs of large allocators, the so-called “elephants.”
By and large, Emerging Managers focus their energies on their products and the respective performance, and in so doing provide excellent returns but ignore vital infrastructure issues. Nevertheless, the large allocators continue to benchmark them against their much larger cousins with respect to business risk. This generally leads these allocators and their advisors, consultants and gatekeepers to default to “larger is better,” due to less perceived business risk without further examination.
Even though Emerging Managers are simply small businesses founded by investment managers, they often do not have the bandwidth to manage their business platform without sacrificing performance. Most Emerging Manager programs were originally designed to level the playing field. However, the new age programs should be focusing on more than market entry opportunities, but rather business development and successful business transitions and exits. Why? The Emerging Manager life cycle being understood and supported will go a long way in deriving “sustainable” excess alpha that Emerging Managers are providing. Much more to come from our team on this topic.
Lessons Learned: Emerging managers shouldn't be ignored.
James A. Casselberry, Jr.
Senior Managing Director
NexTier Companies, LLC