LPs Target Top Talent as They Boost Support for Emerging Managers
Rede Partners announces the results of its Emerging Manager Survey conducted in September 2024. This research surveyed 68 of the most active, predominantly US based, Limited Partners (LPs) investing in emerging managers, offering insights into the current fundraising landscape and investor expectations. Emerging Managers are defined as GPs between Fund I-III and less than US$1bn in fund size.
Key findings from the report:
Robust Commitment to Emerging GPs: 100% of surveyed LPs plan to either maintain or increase their allocations to emerging managers over the next year. Amongst the predominantly North American based LPs surveyed, the US is unanimously the most attractive geography for emerging GPs with LPs also selectively considering Europe and Canada but appetite for Asia is dropping with the exception of India.
Clear differentiation is critical in a competitive market: Industrials, healthcare, and software are the top sectors that surveyed LPs are interested in, with a preference for buyout from a strategy perspective. LPs are looking to identify top talent with a definable edge and exposure that is complementary to their current line up
High Return Expectations: 66% of LPs are underwriting new commitments to emerging GPs with a target of at least a 2.5x net return, reflecting their confidence in the potential for alpha generation but LPs prefer to see multiple strong proof points (exits) before investing
The findings underscore a vibrant environment for emerging GPs, driven by LPs’ strong belief in their ability to deliver competitive returns. The survey reveals that LPs are particularly focused on identifying top talent in the United States, which is viewed as the most attractive market for emerging managers; 100% of respondents expressed interest in investing in this region.
As investors seek opportunities for alpha, the demand for emerging GPs is characterized by a nuanced understanding of market dynamics. LPs are prioritizing sectors that demonstrate resilience and growth potential, with industrials (86%), healthcare (83%), and software (80%) emerging as the leading areas of interest.
Despite the strong interest in emerging GPs, LPs are seeking clear differentiation in the strategies presented. The survey indicates that while LPs are open to various investment approaches, they remain sceptical of sectors perceived as lacking unique value propositions. Only 18% of respondents expressed interest in growth equity and venture capital, emphasizing the need for emerging GPs to present compelling and differentiated investment theses.
Moreover, LPs are looking for GPs with proven track records, (74%) as well as a strong team pedigree (51%) and strategy (68%) are critical when considering investments in emerging managers. The expectation for high performance is underscored by the 66% of LPs targeting at least a 2.5x net return on their new commitments, with many emphasizing the importance of multiple strong proof points before investing.