How Asset Owners Are Solving the Emerging Manager Problem
CIOs weigh in on some of the biggest challenges they face when seeding diverse and emerging investment firms.
Asset owners are ramping up their efforts to put money to work in emerging and diverse investment managers — the latest of which was announced this week.
On Tuesday, the investment committee for Massachusetts Pension Reserves Investment Management provided preliminary approval to invest up to $1 billion more in emerging-diverse managers over the next two years. The fund’s full board will vote on the matter on December 2.
MassPRIM is far from alone in implementing these programs. Take Yale New Haven Health, for example. Associate treasurer and director of investments Geeta Kapadia told Institutional Investor that investing in emerging and diverse managers is “one of our biggest priorities.”
But as a growing number of allocators plan to invest in emerging and diverse managers, they’re faced with challenges not posed by traditional investment firms, ranging from determining the appropriate performance track record to sourcing deals themselves.
“[Allocators] feel overwhelmed with where to start,” said Amy Ridge, a principal at Mercer who works on the firm’s diverse alternative managers efforts.
Some pension funds lean on their consultants to find the right managers. For instance, MassPRIM has retained Hamilton Lane, Bivium Capital, Cambridge Associates, Xponance, and PAAMCO to help it source, conduct due diligence, and monitor emerging and diverse managers in each asset class, according to its Tuesday announcement.
The University System of Maryland Foundation, meanwhile, has tapped into another source for advice.
“Our nontraditional consultants are some fund-of-funds,” said chief investment officer Sam Gallo. “We have relationships with them where we can look inside their database, and they can connect us to emerging managers if we want to talk to any.”
But, Gallo added, this isn’t the only way his team is sourcing managers. “A lot of times it’s talking to peers, pounding the pavement, and spending time on the phone,” Gallo said. “There’s a trust factor to it because you’re talking to people who have invested in it and diligenced it directly, which makes it easier.”
His team has also tapped into a recently-minted organization, Institutional Allocators for Diversity, Equity, & Inclusion, for advice.
The group is a consortium of asset owners working together on improving diversity in the industry, and was founded in part by Robert Rahbari, a senior investment officer at the University of Rochester.
Rahbari said that while the University of Rochester was interested in putting more capital to work toward diverse and emerging managers, his team didn’t have a ton of wiggle room to do so.
“Very few allocators are starting from scratch,” Rahbari said. “Most have well built-up portfolios that they’re generally happy with.”
His team still wanted to have an impact, though, so they landed on setting up a group — along with Trinity Church Wall Street — that would aggregate data on diverse funds, hold events and workshops for managers, share best practices, and create a compendium of research on diversity and investing.
“Our larger and more nimble peers can hopefully learn about [the managers] in that way and allocate capital towards them,” Rahbari said. IADEI regularly holds meetings for allocators in which three women and minority managers pitch their strategies to investors.
One of the most well-known “larger and more nimble” investors is the Teacher Retirement System of Texas, which began its emerging manager program back in 2005 and has committed $5.9 billion to 190 managers since the program’s inception. TRS also runs one of the largest emerging manager conferences in the country alongside its peer, the Employee Retirement System of Texas, each January.
“I have heard from allocators that it is one of the best events to go to if you’re looking for emerging managers,” Gallo said. “That takes you to a whole different level.”
While Kirk Sims, head of the program, touted the conference in an interview with II, he also highlighted other opportunities for allocators to source managers.
“One of the opportunities that I’m not sure that a lot of LPs are aware of is the industry groups,” Sims said.
TRS employees attend events and appear on panels with groups like the Association of Asian American Investment Managers, the New America Alliance (which is for Latinx business leaders), and the National Association of Securities Professionals (for people of color and women in financial services), among other organizations.
“There are industry organizations out there that will allow you to find a diverse roster of possibilities of candidates,” Sims said.
Mercer’s Ridge added to the list of organizations, suggesting the National Association of Investment Companies, 100 Women in Finance, Women’s Association of Venture & Equity (WAVE), and PEWIN, or the Private Equity Women Investor Network.
Kirsty McGuire, PEWIN’s executive director, told II that the group is hoping to create a vetted directory of managers in 2020. Until then, though, she offered up some advice to allocators.
“What we have found that really moves the needle is being one of the first investors in their first fund,” McGuire said. “That’s when they really need the support.”
Allocators say that can be a challenge though, given that new managers often come without a track record to evaluate. As IADEI’s Rahbari noted, “asset owners may not be flexible and creative enough to find ways to evaluate them.”
Kapadia’s team at Yale New Haven is working to do just that. “We like to see a track record,” she said. “There’s not a hard and fast rule… we have in the past been the anchor investor in funds or partnerships that have been launched by people who have been at firms together in the past.”
Oftentimes allocators will seek to seed teams who are spinning out from larger asset managers. Sims said these are some of the most attractive opportunities his team sources.
Added Gallo, “It’s easier to get comfortable with someone who you’ve sat across from in the past.”