How do LPs make their decision to invest?
In our interview with Mina Pacheco Nazemi, Managing Director at Barings Alternative Investments, we take a look at the LPs' point of view to find out why and when a LP would invest in an emerging manager, and how new GPs should approach prospective LPs.
Compared with an established manager, a first-time fund has the potential to offer a greater alignment of interests between a GP and an LP. A lot is on the line for the manager of a new fund. In some cases, these managers have left their previous firm and along with that, their economics (carry and a steady paycheck).
In some instances, they might have to use the equity in their home or perhaps personal savings to cover the costs of getting the business up and running, which could include everything from registering with the SEC to hiring a placement agent.
Many of these managers often have a personal stake in the success or failure of their funds, so you see a closer alignment with limited partners, not only from a monetary standpoint, but also in terms of focus.
Established managers typically have a legacy portfolio they need to manage. With an emerging manager, you’re more likely to find their time and attention completely dedicated to the new fund.
In general, we follow the same investment process and approach with first-time funds as we do with established managers.
Regardless of the fund, our due diligence focuses on the investment team, the strategy and the track record. Most first-time funds don't have an attributable history. In such cases, we look to spend significant time with these funds to gain a perspective on the manager and their team, as well as their experience in their chosen strategy and the sector in which they're investing.
In some instances, we get to know managers before they spin out of a larger organization. For example, three years ago, a manager at an established platform informed me he was planning to launch his own fund. Knowing it would be a multi-year process, we took advantage of that time to work with him and look at investment opportunities alongside him and his team, which afforded us a greater perspective on their capabilities.
Additionally, we leverage our databases, data and in-house resources across the firm to corroborate any performance information an emerging manager provides. In our due diligence process, we seek to validate the team, sourcing capabilities, value-add, as well as how they manage investments and their boards.
In many ways, success for a first-time fund has more to do with a manager’s relationships with limited partners and that manager’s professional experience.
In general, there will be greater interest among investors in a manager who has come from a brand name firm. While a manager requires a strong team, a thoughtful strategy and a viable approach, the most successful managers also have great relationships.
It's a relationship business. That's why when it comes to meeting with emerging managers, we have an open-door policy. We seek to talk with everyone and we are not biased based on previous relationships. We have an open mind to all managers and strategies, and seek to meet with all managers in the market to have a comprehensive view.
Our job is not only to evaluate a manager, but also to provide them with feedback, perspective and guidance. There might be 10 other funds in the market with a strategy similar to theirs. We look to help them understand the competitive landscape, help demystify the fundraising process and guide them toward LPs interested in their type of strategy.
Ultimately for a new manager, it’s about doing their homework, finding the right LPs, establishing relationships and seeing if there is a fit.
In this regard, I am biased. I very much favor specialist funds. While we have backed generalist funds, along with most of the industry, we have increasingly moved toward specialists.
Let me start by saying not only am I a woman, I am a woman of color. I got started in asset management through a combination of two programs supportive of people of color. The first is Sponsors for Education Opportunity, which provides support to undergraduates. The second is the Robert Toigo Foundation, which works with individuals at the graduate level, with a focus on career advancement and increased leadership roles for traditionally underrepresented groups. These two organizations opened doors and guided me toward the many career opportunities available in this field. As a result, my first job out of undergraduate school was in asset management and I’ve been here ever since. I've been investing for 20 years.
In terms of inspiration, I love what I do and whom I do it for. I work with a lot of public pension plans and a lot of investors who look like me. This also includes the plan participants - teachers, police, firemen and firewomen – many of these individuals are people of color. In addition, there aren't many people in a role like mine who look like me and I believe my background and history affords me a different perspective when it comes to vetting and selecting managers. For instance, I’ve been investing in smaller and emerging managers for more than 15 years.
In terms of advice for women in this industry, I think it’s important not to get discouraged, to keep at it and to keep working hard. I like to think I can help level the playing field for women and people of color through my work by backing female and emerging managers who are often under-represented. It’s very gratifying. It’s why I do what I do.