Key Insights into an Investor’s Selection Process – Notes to Emerging Managers

EisnerAmper recently co-hosted The Art of the Seed Deal with Kleinberg Kaplan Wolf Cohen. Speakers discussed their process for seeding managers, how they evaluate managers and what they focus on throughout the evaluation process.

Top-Down vs. Bottom-Up

At the end of the day, both top-down and bottom-up approaches are integral in the evaluation process of a manager. While a bottom-up, fundamentally driven approach is necessary, it is generally not sufficient in and of itself. Typically, the process will start with a bottom-up approach as the primary selection tool (i.e., pedigree, process, performance, risk management process etc.) and thereafter, a top-down approach is utilized to further evaluate the manager. Ultimately, portfolio diversification and strategy diversification are the end-game when adding/replacing a manager in an investor’s portfolio. Therefore, strategic outlook and macroeconomic perspectives are some of the considerations used when utilizing a top-down approach to further evaluate possible new managers.

Intangibles Are Important

The intangibles are important and they are differentiators when evaluating new fund managers. It cannot be stressed enough – an emerging manager needs to reflect and know why they have embarked on the entrepreneurial journey of launching a fund.  Like any other start-up business, it will be difficult and it will take time. As the “CEO” of your new firm, you may need to utilize a different set of skills or develop a new set of skills than when you were managing a portfolio on behalf of a larger platform. At the end of the day, make sure to know your story – why are you starting a fund? What are you trying to accomplish?

Finally, be humble. Naturally a seed investor will have a very close relationship with a fund manager they are investing in. Not only is the process prior to investment long (on average, 6-9 meetings), but there will be an ongoing, closer relationship as both the seeder and fund manager will be in constant contact after an allocation is made.  Character and personality are important – seeders are strategic partners in your business, and therefore, being able to maintain a relationship is important.

Operational Side vs. Investment Side

Investors evaluate both investment and non-investment characteristics when contemplating adding a new manager to their portfolio. On the investment side of the equation, while it may seem obvious, it is important to note: A portfolio manager should focus on managing the portfolio. Investors want to see returns and while managing the business, fundraising, and marketing are also important for an emerging manager, investors will note that the more time the portfolio manager is performing non-investment responsibilities, the less time they are managing the portfolio. Be sure to allocate responsibilities responsibly, whether that is internally by hiring a strong operational partner or outsourcing some of these key functions.