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Could Market Turmoil Hurt Emerging Manager Programs?

Investments with emerging managers are up from this time last year, but institutional engagement is down.

Institutional interest in working with emerging managers has been increasing for years, but recent market volatility and geopolitical uncertainty may steer some capital away from upstart funds.

In the first quarter of 2022, six public pension plans made a cumulative total of $656 million in commitments to emerging managers, higher than the total commitments made in the first quarters of 2020 and 2021, according to an eVestment report released Monday. These commitments went to real estate funds, a middle market buyout fund, a large-cap developed international equity strategy, a discretionary private equity emerging manager program, and an alumni manager from a global equity emerging manager program.

“We’ve been seeing increases in [the size of] mandates to emerging managers,” Peter Laurelli, global head of research at eVestment, told Institutional Investor. “[Even] in periods where the volume might be cyclically lower, it’s still increasing over time, so that’s encouraging for interest in emerging manager exposure.”

While the report acknowledged that the term “emerging manager” means different things to different people, in general, eVestment defines an emerging manager as an asset manager with less than $2.5 billion in assets under management and an employee-ownership rate of 50 percent or higher.

Despite larger public plan commitments to emerging managers, institutional engagement in the emerging manager space declined slightly in the first quarter of this year. Laurelli compiled information about the type, size, and products of the firms analyzed in the report, which eVestment uses to create profiles that allow clients to access a standard viewing of the firms’ offerings.

For example, if an investor or consultant is interested in working with a firm, they access the product profile. When a product profile is clicked, eVestment tracks it. The number of clicks on a profile determines the level of engagement with that firm in eVestment’s dataset. “It’s [the] click activity of the product profiles that makes up this proportion of interest [in emerging managers] that you’re seeing,” Laurelli said.

Based on total profile views, client activity directed toward emerging managers declined from 6.8 percent in 2021 to 5.2 percent in the first quarter of 2022. Laurelli attributed the decrease in client activity to events in the wider world, including rising inflation, tightening fiscal policy, and the war between Russia and Ukraine.

Still, Laurelli said he doesn’t believe the report’s findings indicate a wider move away from interest in emerging managers. Laurelli said that his firm hasn’t seen any changes in how investors are thinking about their emerging manager platforms and allocations. “Interest won’t go away,” he said. “I don’t think the dip now is any sort of signal that there’s lack of interest in emerging managers. It will come back. When? We’ll have to see.”

Interest in emerging managers also differs greatly by client type, according to the report. For instance, consultants accounted for 56.2 percent of all emerging manager product views, while managers-of-managers accounted for 22.9 percent. Foundations and endowments accounted for 7.4 percent, followed by public pensions at 5.2 percent.

Laurelli said the variation may have something to do with the level of risk associated with allocating to an emerging manager. While emerging managers themselves aren’t inherently risky, investing with an emerging manager requires ample due diligence on the part of the investor. Some fund types have less time and fewer resources to allocate to emerging managers; some just don’t have an interest or don’t think it’s worth it.

This is where consultants come in. Laurelli said that consultants, who make up a large majority of the emerging manager profile views, are tasked with conducting the due diligence for the investors, and this, not surprisingly, is why they have the highest engagement with emerging manager profiles. Managers-of-managers are next in line, which Laurelli said makes sense because these investors focus most of their attention on the emerging manager space.

After that, Laurelli said that the degree of interest in emerging managers drops in proportion to the risk involved. For example, foundations and endowments (7.4 percent) are willing to take on more risk than corporate pension plans (3.1 percent) and are subsequently more engaged with emerging managers. “It makes sense that those who [are willing] to take more risks would be allocating more attention to that segment,” Laurelli said.

While institutional interest in emerging managers only descended slightly from 2021 to 2022,  Laurelli said that the space is worth keeping an eye on. “As the world changes and gets more [volatile], it will be interesting to see how activity for emerging managers may shift,” he said.

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