Diverse Managers Are Stuck. Can Changes to Seeding and Anchoring Deals Help?
“A lot of investors are hesitant to be in a first close or to go first. They want to see a seeded portfolio, they want to see evidence of fundraising traction. But at the end of the day, someone has to go first,” says MPowered’s Yibai Li Haney.
The numbers aren’t budging: diverse-owned firms manage only 1.4 percent of the $82 trillion in assets managed for U.S. institutions. Ten years ago, that number was virtually the same: 1.3 percent.
“If you look at the hard figures it’s clear that what we’ve been doing historically is not working; it’s not moving more capital to deserving diverse investment talent,” said Yibai Li Haney, a director at MPowered Capital, which invests in women and diverse managers in alternatives, and who primarily focuses on sourcing and GP structured partnerships. Haney was previously a structured and growth equity investor at Virgo Investment Group.
Traditionally-structured deals with diverse managers are part of the problem, according to MPowered, which was founded three years ago by Marcia Page, co-founder and co-executive chair of asset management firm Värde Partners. Page thinks one option to increase diversity in alternatives is changing the structures and terms of anchor investor and seeding deals. These deals need to be designed specifically to remove obstacles put in front of diverse managers, including providing working capital, early fund commitments, and strategic advice. (MPowered calls the deal framework it uses to address these limitations a GP structured partnership.)
MPowered’s findings come from the 150 to 200 annual meetings it has with firms it may want to invest in and 200 survey responses that included diverse and non-diverse founders of firms and managers considering a launch. Among other things, the survey uncovered obstacles in building a firm and some potential solutions to make it easier.
Respondents told MPowered that existing diverse manager and emerging manager programs were two of the least helpful sources, in part because they take a check-the-box strategy to due diligence and their requirements often make some problems worse, including working capital. One white female founder told MPowered, “The [emerging manager] programs tend to be pretty risk averse in terms of backing new GPs [general partners] versus new funds raised by GPs spinning out of an established firm.” The founder said that creates inherent bias against minority managers because there are not enough diverse people at firms with a long history to support a pipeline of spin-outs.
The survey found that two of the biggest challenges for diverse managers are finding a seed or anchor investor, whose support includes money for operations and GP commitments — money that partners put into funds alongside limited partners. Seeders and anchor investors also support fundraising.
Diving deeper into those challenges, MPowered says working capital can be harder to come by for diverse managers, in part because their wages and accumulated wealth is lower than their white male peers. They also have networks that don’t include as many wealthy and well connected people. White male peers simply have more money and connections at their disposal.
Working capital “is distinct from early fund capital. This is capital to build a team, put in place essential operations and back-office infrastructure before an institutional investor will consider a fund commitment,” said Haney. “A lot of investors are hesitant to be in a first close or to go first. They want to see a seeded portfolio, they want to see evidence of fundraising traction. But at the end of the day, someone has to go first,” she said.
To combat the working capital problem, MPowered has built revenue sharing arrangements into its GP structured partnerships. But the firm also has stepped back in some cases from long-term ownership. It incorporates step-downs and sunset features into revenue -sharing arrangements.
As Haney said many seeders get a permanent ownership stake in a manager in exchange for providing upfront capital. But as the manager grows over time, they need to have more economics to incentivize their team, and who know what the manager is going to look like 10, 15, 20 years down the road.”
“Philosophically, [there’s] a desire for the diverse talent to, at the end of the day, own their own firm and have the benefits of long-term income and wealth generation associated with that proposition,” said Page.
Another challenge is getting fund commitments early on — necessary to attract other investors. Even institutions with emerging and diverse manager programs are cautious about going first, said Page. MPowered generally commits to the fund for the first close, and is often the first institutional investor to make a commitment.
Diverse managers also face a dearth of strategic advice and operational support.
“We’ve seen a number of really incredible investors who have identified a distinctive investment strategy that they want to pursue, but if they came from a large organization with call it a 1 to 200 person operation back office team, there were just many parts of the business that they didn’t have to worry about,” Haney said.