Thriving Amid Market Shifts: Takeaways From the Emerging Manager Conference

May 22, 2024

McGuireWoods recently hosted its annual Emerging Manager Conference at The Ritz-Carlton in Dallas, drawing around 1,000 emerging managers and limited partners (LPs) with diverse investment strategies. The two-day event is the cornerstone of the McGuireWoods Emerging Manager Program. This year’s conference featured speed-networking and engaging panel discussions led by McGuireWoods partners, each designed to address pivotal aspects of the investment and fundraising process.

Read on for some of the key takeaways from these discussions.

Focus on Differentiation: Emerging managers should clearly articulate what sets their fund apart from others, often referred to as the “secret sauce.” This could be a unique strategy, exceptional team experience or past successful deals. Having a demonstrable track record of sourcing and executing deals is critical, even if investments have yet to be realized. 

Maximize the Actual Pitch: Engage LPs in a dialogue rather than delivering a monologue. This approach helps retain their attention and make the interaction more memorable. In pitches, less is more; managers were encouraged to streamline their presentations to capture key information without overwhelming LPs. Presentation decks should be concise, focusing on essential information with clear, impactful messaging and serving as a tool to guide the conversation, not dominate it.

Building Long-Term Relationships: Emerging managers should start building relationships with potential LPs well before fundraising begins. This helps establish trust and allows LPs to become familiar with management philosophy and operational strategy without the pressure of an immediate investment decision.

Creating Momentum and Managing Expectations: GPs are advised to create a sense of urgency or scarcity, including setting strategic closing dates or using anchor investors to wrap up fundraising to focus on fund investing and management. It is important to manage expectations through clear and continuous communication to keep potential investors informed about the fund’s progress and any changes in strategy.

Use of Placement Agents: Selecting the right placement agent can be transformative for an expedient fundraise and selecting the wrong one can set the process back or worse. Find a placement agent that understands and aligns with the fund strategy and demonstrates excellent relationships with the target investor pool. In addition to introductions to LPs, excellent placement agents will help craft the sponsor’s message, enhancing the overall effectiveness of fundraising efforts.

Approaches to Overcome Fundraising Challenges: Creative structuring of fund terms and co-investment opportunities can help attract LP commitments, and innovative financing solutions and fund structures — such as bridge funds, special purpose vehicles (SPVs) and warehousing strategies — can facilitate initial fundraising efforts and align interests between managers and investors. Despite potential fundraising challenges, there always is capital available for great opportunities.

The Role of Secondaries and Seeding Programs: In today’s environment, secondaries and seeding programs can provide liquidity and enable GPs to manage their portfolios more actively. The trade-offs involved in negotiating terms with seed/anchor investors are critical to understand and usually demand balancing capital requirements and the terms offered by anchors to ensure they do not overly constrain the fund’s operations or future fundraising capabilities.

Handling Negotiations and Terms: Navigating the negotiation of terms with anchor investors and other early-stage LPs is crucial. These negotiations can set precedents that affect the attractiveness of the fund to subsequent investors. Take time to understand your fund terms, market movements, typical points that are negotiated and the rationale for any unique terms that will apply to the fund.

Choosing the Right Partner(s) at an Emerging Manager: A successful partnership often hinges on each partner bringing complementary skills and expertise to the table. This diversity in capabilities helps in tackling aspects of fund management, from investment strategy to investor relationships and operational management. The ability to lead, inspire and manage a team effectively is vital for maintaining morale and enhancing productivity. As part of the process, clearly defining roles and responsibilities ensures that each partner knows their duties and contributes effectively. Regardless, partners must have a predefined framework for handling disagreements to maintain harmony and decision-making efficiency within the firm. Trust and personal compatibility are paramount when choosing partners to launch a new fund.

Role of LPs in Driving Change: LPs have a unique opportunity to influence fund strategies and management decisions by prioritizing diversity, inclusion and sustainable investment practices. This influence extends beyond financial returns to encompass broader social, environmental and economic impacts. Recognizing the inherent challenges associated with integrating change into traditional investment structures, change can also be enacted in various ways that reflect institutional and stakeholder priorities (e.g., investment portfolio construction, implementation of operational and personnel protocols, and the collection and ongoing measurement of data). 

Strategic Approaches to Diversity and Inclusion: The importance of diversity and inclusion, not only as a moral imperative but as a strategic advantage, was emphasized. By fostering diversity of thought and investing in diverse fund managers and entrepreneurs, LPs can access untapped markets, drive innovation and potentially unlock durable returns.

McGuireWoods partner Jon Finger co-leads the firm’s private equity industry team and leads the Emerging Manager Program. Rob Fox is managing director of private equity at McGuireWoods.

Special thanks to contributions from McGuireWoods partners Rick Starling, Billy Herrfeldt, Tom Zahn, Abdul-Rahman Lediju, Kevin Boardman and Geoff Cockrell.