Previously, I have written a piece on the case for female fund managers, in which also I made a case for first-time fund managers, so I thought of dedicating a whole post on five reasons to back first-time fund managers (FTFMs).
Here are the five reasons that make FTFMs an attractive opportunity for LPs to diversify their capital allocation to:
Performance: Most emerging firms raise smaller funds than their established counterparts. Smaller VC funds generally outperform because a single outlier can generate more robust fund-level performance. Rather than deploying a percentage of a larger fund, these partners are now deploying all of a smaller fund.
Preqin’s analysis1 showed a consistent 3% outperformance in IRR in several vintage years.
17.7% of first-time funds had an IRR of more than 25% compared with 11.3% of vehicles that are Fund IV or later, according to PitchBook's latest private equity fund performance data2.
In Greenspring Associates’ experience investing across approximately 180 partnerships, emerging managers have outperformed3 relative to their established counterparts.
”In venture capital, smaller funds generally outperform, as a single outlier has the potential to generate fund-level solid performance, even if the fund is only able to garner modest ownership. “
Alignment of incentives: With smaller fund sizes and no prior funds paying management or incentive fees, first-time managers need to produce returns to get paid beyond a minimal salary.
Newer Models, Rethinking Industry: Emerging managers generally rethink strategy, process, and objectives to support entrepreneurs.
They promote better suited, more impactful, and more efficient venture fund models. And they tend to specialize more narrowly, becoming more adapted to the increased sophistication and specialization of the venture space.
Pipeline diversity: Access to a unique pipeline, especially if emerging managers come from diverse backgrounds.
And most importantly - Timing: While since the onset of the COVID crisis, established VCs have focused on padding the balance sheets of their existing portfolio rather than take on new risk, it is at significant hinge points in history like now that the most exciting new investment opportunities appear.
I am continuously looking for first-time fund managers looking to create their first-time impact funds with an edge or a differentiated value proposition in emerging economies. If you are building one, please do write to me. I would love to learn more from you and would be happy to help in any way.
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