Embracing Emergence Is Approaching 1-Year

We are approaching 1 year of Embracing Emergence and have since grown as a community! Thank you for supporting this community 🤝

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Volume #19 TL;DR:

• We used to have to send smoke signals and scream into the wilderness: “Hello, Emerging Managers offer not only an attractive risk-return profile, but they actually offer outlier returns.” I haven’t sent smoke signals for a while…

• Now that the veil of misconception has been torn, we are facing a different kind of inefficiency: The Mystification of the Emerging Manager.

• Both sides have to move towards each other. This is what Embracing Emergence is for: a space to identify what we both, Managers and LPs, have to do, in order to bridge the gap between each other.

Table of Contents

• Embracing Emergence Is Approaching 1-Year

• The Misconception

• The Mystification

• What I Can Offer Right Now

The Misconception

I recently got to speak with Matt Cohen on his Tank Talks podcast about the craft of building relationships between Emerging Managers and Limited Partners.

We spent the beginning of our conversation around the question of commonly held misconceptions Limited Partners have when it comes to Emerging Managers. After the podcast I was reflecting and felt stirred to formulate the current situation I am perceiving when looking at the misconceptions/inefficiencies in the EM-LP landscape. So, here we go.

Based upon my conversations with Limited Partners and perceiving the amount of reports, data, and calls to attention from fellow LPs, I can say that we are slowly but surely moving away from the main misconception around Emerging Managers. Which was: Emerging Managers are more risky and we are unsure about their return profile.

I can list 12-or-so factors of why this misconception is false (read about all points in detail here):

1. Attractive Risk / Return Profile

2. Fund-of-Fund Approach as Extra Sauce

3. Access

4. Alignment

5. Co-Investment Opportunities

6. Access to Top Talent

7. Insights

8. More Time to Build Trust

9. Time Efficiency

10. Access to Strategics

11. “Influence-to-Investment Ratio”

12. Impact

Here are a few visual data points that many of you will likely have seen showing the outperformance of smaller funds, just to underline the upraising availability of information countering this misconception:

We used to have to send smoke signals and scream into the wilderness: “Hello, Emerging Managers offer not only an attractive risk-return profile, but they actually offer outlier returns.” I haven’t sent smoke signals for a while..

I am not saying that we are done with our work of gathering data and insights around the risk-return profile of Emerging Managers, or educating Emerging Managers and LPs, but I am saying that we are actively moving past this big hurdle.

The Mystification

Now that the veil of misconception has been torn, we are facing a different kind of inefficiency: The Mystification of the Emerging Manager.

Emerging Managers were hidden behind the misconception and even though they are now appearing more clearly, it seems as if many Limited Partners are now searching for the right approach to see the true face of the Managers.

Which brings me to the problem we need to solve for today:

1. Limited Partners need more resources to refine their approach of conducting due diligence on Emerging Managers.

2. Emerging Managers need to refine their approach of appearing more clearly to Limited Partners.

This problem is exactly why the EM-LP relationship can sometimes feel so inefficient. It is because it involves both sides, and one side refining their approach still would leave a gap in the middle.

Both sides have to move towards each other. This is what Embracing Emergence is for: a space to identify what we both, Managers and LPs, have to do, in order to bridge the gap between each other.

What I Can Offer Right Now

Solving the problem is complex, full of nuance, and will take longer than moving past the initial misconception we had mentioned has taken. By the way, I also don’t think that a software platform helping LPs diligence Emerging Managers will get the job done…

Also, I know people much smarter than me, who are actively providing resources and frameworks, and insights to fellow LPs.

For Limited Partners:

But here is what I can say and offer right now to keep pushing the solution to the current problem further along. In my experience, what helps the Limited Partner make investment decision is trust - especially trust in peers. Having fellow LPs around you, who can share their reasoning behind an investment decision, can create more comfortability with an opportunity. Trust creates trust.

Also, fellow LPs are simply closer to the situation and frameworks LPs have to think through. Oftentimes Emerging Managers have to convince LPs of why they are a good opportunity - if more LPs were to share their reasoning behind the investment, more LPs would follow.

This is why I created a community for LPs who are actively investing in Emerging Managers. It’s a simple group chat on WhatsApp, that is invite only.

• The group is no spam - just peers, who are all pursuing the same goal.

• Every person who joins has a clear understanding of what the group is for.

• We share reports, data, insights on Emerging Managers.

• We share the best funds we are looking at / have invested in.

• We can do reference checks on GPs simply and quickly.

• Members share insights into their strategy, reasoning, and investment approach.

If you are an LP and you are looking for a space to ask honest questions, share insights, and find the best opportunities, please respond to this email.

For Emerging Managers:

The challenge the Emerging Manager is facing is equally complex and nuanced. Plus, the Emerging Manager is dependent on the Limited Partner, which makes this problem more uncomfortable for this side of the current gap.

The Emerging Manager is faced with their own perception that comes from Limited Partners. So, the challenge is to identify unique ways to step out of the fog of mysticism into clarity. And yes, the Limited Partner needs to know how to approach the asset class of Emerging Managers, but Emerging Managers also need to know how to approach the Limited Partner.

So, how can Emerging Managers go about creating more clarity around their fund? Language, language, language. I have been reviewing dozens of decks, and several conversations with Emerging Managers with the goal to extract more their personal alignment with their strategy, more of the mission of their fund, and more of why they are uniquely positioned to execute.

My friend Jamie Rhode wrote this on Embracing Emergence, and it underlines the point being made:

If you are an Emerging Manager and would like to have a conversation around this and optimize around communicating the alignment of your fund with your experience, telling your story, communicating your unique position, and telling a compelling mission, respond to this email.

Also, the customer service the Emerging Manager can provide to LPs matters. And the onboarding experience of LP, how they receive tax docs, etc. - it all adds up. You are not going to be a top decile fund because of your admin platform, but you can have a bottom-quartile customer experience because of your admin platform. You’re not going to differentiate upwards with the platform you choose to run your fund on, but you have potential to differentiate into a disadvantageous direction with it..

If you haven’t yet, have a look at what Sydecar offers to Emerging Managers - it’s the go-to platform for emerging VCs to manage both their SPVs and funds. Sydecar delivers on all fronts, ensuring both managers and investors have the support they need from a platform they can trust.

Sydecar’s powerful software allows Emerging Managers to launch SPVs and funds instantly, track funding in realtime, and offer hassle-free opportunities for early liquidity.Sydecar acts as the silent operating partner to Emerging Managers, handling all back-office functions in a single place. Say goodbye to chasing subscription docs, lost wires, or late K-1s. And for LPs, as an LP myself, I know how important it is to have an easy onboarding process, along with quarterly capital calls and tax docs, all managed by a trusted platform.

Click here to reach out to their team via the exclusive link for our community.

Please feel free to forward today’s volume to anybody this could be of interest for.