October 26, 2015
Interviewed by: Tom Franco
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The LP View of First-time Funds

Raising a first-time fund has certain barriers to entry that could pose difficulty for managers. But that doesn’t mean LPs aren’t willing to invest in these funds. We hear from four LPs about whether they would invest in a first-time fund.

Raising a first-time fund has certain barriers to entry that could pose difficulty for managers. But that doesn’t mean LPs aren’t willing to invest in these funds. We hear from four LPs about whether they would invest in a first-time fund.

The LP View of First-time Funds
Through the Lens of the LP

Are LPs likely or not likely to back first-time fund managers?

Jonathan Roth, Abbott Capital Management:We can look at a lot of emerging managers who never have the benefit of managing institutional capital, but have the benefit of a balance sheet from an insurance company or from a bank that was—they were able to create a track record of making principal investments as a group, prosecuting a strategy that they want to replicate going forward. A team that is doing that collectively and leaves that balance sheet, or source of capital, and spins out lots of great stories—like Welsh Carson spinning out of Citibank, Madison Dearborn spinning out of First Chicago, Golda Toma spinning out of First Chicago. A lot of banks have been sources for it, but same with insurance companies.

Sheryl Schwartz, Caspian Private Equity: Just because you’re newly formed doesn’t mean you haven’t done all those other things. In fact, a lot of the newly-formed funds are people who are spinning out of other groups, so they may have worked in the last down cycle. It just means you have to really verify their track record and spend significantly more time in underwriting. We recently made a commitment to a “first-time fund” that was a spinout from a larger firm. Attribution and understanding who did what and really getting behind the track record took us much, much longer to do due diligence because of that, but I wouldn’t say they didn’t have experience in a prior cycle…or in different economic environments. They had everything that I said—it was just proving it took a lot longer. But we do a lot of younger emerging managers, so that’s not unusual for us.

Pete Keliuotis, Cliffwater: As long as they’ve brought with them to the new firm the pedigree and the track record that they’ve been able to demonstrate that success at prior firms, there’s definitely interest. We’ve seen a few relatively new firms that have really grown rapidly in the past few years. I think, especially among the endowment foundation community, we see a lot of attention because they’re trying to focus on typically smaller GPs. There’s a lot of attention on trying to identify firms that are going to have that initial growth trajectory and success.

Daniel Feder, Washington University Investment Management Co.:  We want to back managers who make good decisions and who aren’t always unlucky, but the fact that there has been a bad outcome does not mean that that’s a low-quality manager. It’s funny, because in the world of more liquid markets and public equities, there’s not such a penalty for down years and up years. Chasing return is viewed as silly and a behavioral flaw, but in private markets, it seems that there’s this habit of just looking for lucky managers and figuring whether luck will persist without really paying enough attention to why it happened.

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