First-time fortunes for emerging managers

Emerging manager fundraising remains exceptionally tough. But some sector specialists are still succeeding.

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Just under one-third of investors expect to invest in fewer emerging managers in the next 12 months compared with the past year, according to Infrastructure Investor’s LP Perspectives 2023 Study. Meanwhile, only 7 percent anticipate increasing their emerging manager activity. Indeed, after a dismal period for first-time fundraising during the pandemic, the situation appears little improved.

There are exceptions, however. “It is definitely tough to raise an emerging manager fund today. But it is still possible,” says Bruce Chapman, co-founder of Threadmark. “In fact, around half the money we have closed in the last month was for a first-time fund. With the right team and the right track record, investors can be persuaded. You just have to be extremely thoughtful about market positioning and strategy.”

Chapman points to the energy transition as an obvious sweet spot. “The Ukraine crisis has increased the sense of opportunity in that space even further,” he says. “There is also a lot of money chasing that theme, of course, so even within a specialist field you have to make sure you are differentiated. The investor community isn’t interested in another me-too offering.”

Raising a generalist first-time fund would be exceedingly challenging, according to Chapman. Although he concedes that there is room for mid-market entrants, particularly in the US, where incumbents have quickly raised larger funds and moved up the size spectrum. 

Bart Molloy, a partner at Monument Group, adds that there are also new entrants in the digital infrastructure space. He agrees, however, that raising a first-time fund in this environment is far from easy. “Our advice is to secure a cornerstone investor or syndicate from your prior life before formally making a market pitch,” Molloy says. “That should give you some momentum, as opposed to spending your days at endless first meetings where the follow up just isn’t there.”

Gordon Bajnai, a partner at Campbell Lutyens, says it is not only emerging managers struggling to forge new investor relationships. “Securing any new relationship is difficult, regardless of whether you are a first-time fund,” he says. “LPs are already burdened with an oversupply of funds coming to market, and with reduced liquidity as a result of the denominator effect, their focus is overwhelmingly on re-ups.”

Sector specialist successes

A steady stream of new entrants are nonetheless braving this brutal backdrop. “We continue to see a healthy mix of first-time fund managers coming to market,” says Brent Burnett, head of real assets investments at Hamilton Lane. “Infrastructure, as an asset class, is still in growth mode, with many institutions only now building out their infrastructure exposures.

“At the same time, GPs are raising successively larger funds and the industry is starting to look more like private equity, with a mid-cap and mega-cap market,” Burnett continues. “That has resulted in a funding gap in the smaller deal space, which is creating opportunities for teams to spin out of incumbents – either individuals who have run regional or country teams or sector leads, particularly in digital infrastructure and the energy transition.” 

For example, Sandbrook Capital, a firm led by a founding team of ex-Riverstone partners, is in the market seeking a significant $1 billion for its maiden climate infrastructure offering and is understood to be well on its way to reaching that goal. Meanwhile, UK real assets firm Astarte Capital Partners has teamed up with Quintana Infrastructure & Development, a Houston-based operator, to launch a mid-market firm focused on North America. 

Climate Adaptive Infrastructure, a firm founded in 2019 by former Macquarie executive Bill Green, has raised more than $1 billion for its debut fund programme, which targets investments in energy, water and urban infrastructure.

“There are instances of successful first-time fundraisings, particularly where a manager has a specific skill set of knowledge, most notably around digital infrastructure and sustainability,” concludes Bajnai. However, he adds that the more notable trend involves established managers launching new strategies. 

“We are seeing firms that have historically focused on value-add move to core, or else specialist funds around the energy transition. There are also examples of large-cap houses going back to their roots with a mid-cap strategy. We are seeing far more of these brand extensions than genuine first-time funds.”