PitchBook News - Does experience matter?

The building blocks of private market portfolios are the external fund managers investing capital on LPs' behalf.

How an LP chooses to construct its portfolio with those building blocks is vital to achieving return goals within an acceptable risk profile.

As allocator budgets for private markets have increasingly tightened amid a slowdown in distributions, many LPs have leaned toward the perceived safety of established firms with proven track records and stable returns.

That's left emerging managers struggling to raise funds and an increasing consolidation of capital into the hands of large, multistrategy firms.

However, is this shift in LPs' interest?

Emerging managers (those with 3 or fewer fund launches) often carve out niche strategies that allow them to exploit opportunities not readily available to larger, more established firms (4+ funds). These can include technology specialization in VC, regional focus in real estate, or under-tapped, smaller buyout opportunities in PE.

The size and agility of these funds often result in a wider dispersion of returns, which, while implying higher risk, also suggest a significant potential for higher rewards.

Spanning buyout, VC, real estate, and private debt strategies, our data indicates that portfolios constructed of emerging managers could, in many cases, have outperformed those constructed solely of established firms—and with lower downside via diversification.

The findings are not without nuance, though. For buyout funds, emerging managers have only recently seen a more pronounced upside over established GP peers, stemming from ballooning fund sizes of mature PE firms.

In VC, specialist managers, regardless of firm experience, have tended to be the winners compared with generalists. And in real estate and private debt, recent outperformance of emerging manager portfolios hasn't necessarily been consistent with history.

 

Click for a larger view of this chart on VC fund performance.