How Asset Owners Solve the Emerging Managers Problem

Asset owners are stepping up efforts to put money to work in emerging and diverse investment managers – the latest of which was announced this week.

Massachusetts Pension Reserves Investment Management’s investment committee on Tuesday gave preliminary approval to invest up to $ 1 billion more in diversified emerging managers over the next two years. The entire board of directors of the fund will vote on the issue on December 2.

MassPRIM is far from being the only one to implement these programs. Take Yale New Haven Health, for example. Associate Treasurer and Chief Investment Officer Geeta Kapadia said Institutional investor that investing in emerging and diversified managers is “one of our top priorities”.

But as a growing number of allocators consider investing in emerging and diverse managers, they face challenges that traditional investment firms do not present, ranging from determining the right performance track record to researching. of agreements themselves.

“[Allocators] I feel overwhelmed where to start, ”said Amy Ridge, principal at Mercer who works on the company’s various alternative management efforts.

Some pension funds rely on their consultants to find the right managers. For example, MassPRIM retained the services of Hamilton Lane, Bivium Capital, Cambridge Associates, Xponance and PAAMCO to help it research, perform due diligence and monitor emerging and diversified managers in each asset class, according to its announcement of Tuesday.

The Maryland University System Foundation, meanwhile, tapped into another source of advice.

“Our non-traditional consultants are funds of funds,” said Sam Gallo, chief investment officer. “We have relationships with them where we can look at their database, and they can put us in touch with emerging managers if we want to talk to any of them. ”

But, Gallo added, that’s not the only way his team recruits managers. “A lot of times it’s about talking to peers, hammering the curb and spending time on the phone,” Gallo said. “There is a trust factor because you talk to people who have invested in it and applied it directly, which makes it easier. ”

His team also turned to a newly formed organization, Institutional Allocators for Diversity, Equity, & Inclusion, for advice.

The group is a consortium of asset owners working together to improve diversity in the industry, and was founded in part by Robert Rahbari, senior investment manager at the University of Rochester.

Rahbari said that while the University of Rochester was interested in investing more capital in diverse and emerging managers, his team didn’t have much leeway to do so.

“Very few allocators are starting from scratch,” said Rahbari. “Most have well-constructed portfolios that they’re generally happy with. ”

His team always wanted to make an impact, so they decided to create a group – along with Trinity Church Wall Street – that would aggregate data on various funds, run events and workshops for managers, share best practices, and create a compendium. research on diversity and investment.

“Our taller, more agile peers can hopefully learn more about [the managers] in this way and allocate capital to them, ”said Rahbari. IADEI regularly organizes allocator meetings during which three women and minority managers present their strategies to investors.

One of the best-known “bigger, more nimble” investors is the Teacher Retirement System of Texas, which launched its Emerging Management program in 2005 and has committed $ 5.9 billion to 190 managers since the inception of the. program. TRS also hosts one of the nation’s largest emerging manager conferences alongside its counterpart, the Employee Retirement System of Texas, each January.

“I’ve heard from dispatchers that this is one of the best events to go to if you are looking for emerging managers,” said Gallo. “It takes you to a whole new level. ”

While Kirk Sims, head of the program, touted the conference in an interview with II, he also highlighted other opportunities for beneficiaries to source managers.

“One of the opportunities that I’m not sure a lot of LPs are aware of is industry bands,” Sims said.

TRS employees attend events and participate in panels with groups such as the Association of Asian American Investment Managers, the New America Alliance (which caters to Latinx business leaders), and the National Association of Securities Professionals (for people of color and women in financial services), among other organizations.

“There are organizations in the industry that will allow you to find a diverse list of candidate opportunities,” Sims said.

Mercer’s Ridge was added to the list of organizations, suggesting the National Association of Investment Companies, 100 Women in Finance, the Women’s Association of Venture & Equity (WAVE) and PEWIN, or the Private Equity Women Investor Network.

Kirsty McGuire, Executive Director of PEWIN, said II that the group hopes to create a controlled directory of managers in 2020. So far, however, she has offered some advice to dispatchers.

“What we’ve found that really makes a difference is being an early investor in their first fund,” McGuire said. “That’s when they really need support. ”

Dispatchers say this can be a challenge, given that new managers often arrive without a background to assess. As IADEI’s Rahbari noted, “asset owners may not be flexible and creative enough to find ways to value them”.

The Kapadia team at Yale New Haven strives to achieve this. “We like to see a track record,” she said. “There is no hard and fast rule… in the past we have been the primary investor in funds or partnerships that have been started by people who have worked together in companies in the past. ”

Often, dispatchers will seek to form teams from larger asset managers. Sims said these are some of the more compelling opportunities on his team.

Gallo added: “It’s easier to get comfortable with someone you’ve sat down with in the past.”